Optimistic Reporting and Pessimistic Investing: Do Pro Forma Earnings Disclosures Attract Short Sellers?

Christensen, Theodore E.; Drake, Michael S.; Thornock, Jacob R.

doi:10.1111/1911-3846.12009

Cited by 88 publications

(49 citation statements)

References 81 publications

(164 reference statements)

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“…The mean value of DTAX is 0.0377, consistent with Rego and Wilson (2012). The mean (median) short-interest level is 3.78 (1.69 percent of shares outstanding), which is consistent with that of the prior literature (Chi et al, 2014;Christensen, Drake, & Thornock, 2014). Similar to Rego and Wilson (2012), the average firm has total assets worth US$424 million, with 6.00 percent spent on R&D and 6.30 percent spent on capital expenditures.…”

Section: Datasupporting

confidence: 82%

Short Selling and Corporate Tax Avoidance

Guo¹,

Chi²,

Cook³

2018

Advances in Taxation

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This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms' stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

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Section: Datasupporting

confidence: 82%

Short Selling and Corporate Tax Avoidance

Guo¹,

Chi²,

Cook³

2018

Advances in Taxation

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“…These studies find evidence consistent with less (but not more) sophisticated investors relying on non‐GAAP information (Allee, Bhattacharya, Black, & Christensen, ; Bhattacharya, Black, Christensen, & Mergenthaler, ). More recently, Christensen, Drake, and Thornock () find that short sellers, who are generally deemed to be informed traders, trade as if non‐GAAP earnings disclosures generate exploitable information advantages. Their results are consistent with short sellers viewing non‐GAAP earnings disclosures as a signal of lower reporting quality and future underperformance and trading to take advantage of potential information asymmetries arising from the disclosures .…”

Section: Regulatory Standard Setting and Academic Foundationsmentioning

confidence: 99%

“…Panel A reports non‐GAAP exclusion counts by year and classifies them into the following categories: Total Exclusions , Nonrecurring Exclusions , Recurring Exclusions , and Uncommon Exclusions . Total Exclusions encompass both Nonrecurring and Recurring Exclusions , with these latter exclusion categories relating to exclusion types that are traditionally categorized as “nonrecurring” or “recurring” in the extant literature (Christensen et al., ) . Uncommon Exclusions are as previously defined.…”

Section: Sample Selection and Descriptive Evidencementioning

confidence: 99%

Non‐GAAP reporting: Evidence from academia and current practice

Black

Christensen

Ciesielski

et al. 2018

Business Fin & Account

Self Cite

187

136

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The number of firms reporting earnings on a non-GAAP basis has increased dramatically over the last decade, and non-GAAP reporting is now commonplace in capital markets. This proliferation of non-GAAP reporting has renewed both regulators' and standard setters' interests in these alternative performance metrics. For example, the SEC, FASB, and IASB have all recently questioned what this increasing reporting trend means for IFRS-and US-GAAP-based reporting and whether these measures are misleading to investors. This increasing focus on non-GAAP metrics motivates us to synthesize the nearly two decades of research on non-GAAP reporting to provide insights on what academics have learned to date about this reporting practice. Then, we utilize a novel dataset of detailed non-GAAP disclosures to provide new descriptive evidence on current trends in non-GAAP reporting and its recent proliferation. Finally, we discuss important questions for future researchers to consider in moving the literature forward. K E Y W O R D Snon-GAAP earnings, regulation, standard setting INTRODUCTIONManagers, financial analysts, investors, lenders, compensation committees, and other stakeholders often evaluate a company's earnings performance using metrics other than GAAP-based net income. These stakeholders generally start with GAAP earnings and back out (or exclude) earnings components that they deem to be transitory or noncash. They argue that these excluded items are less relevant for assessing firm performance and that the "non-GAAP" performance number is more appropriate for their intended purposes. The growth in these non-GAAP metrics over the past 20 years reflects a widespread acceptance of non-standard performance metrics as a way to evaluate firm performance.Although skeptics have frequently viewed non-GAAP disclosure as a threat to the traditional GAAP-based income statement, regulators recognize that non-GAAP metrics can be informative to investors and have laid the groundwork for firms to disclose these metrics in a transparent manner. Standard setters and regulators have recently renewed J Bus Fin Acc. 2018;45:259-294. wileyonlinelibrary.com/journal/jbfa

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“…I first use propensity-score matching (PSM) to identify a sample of guidance that did not receive press coverage, but is otherwise similar across all observable dimensions to the covered guidance (Armstrong et al 2010). For my second matched sample of guidance, I match each covered guidance observation with a non-covered guidance observation issued by the same firm within one year of the covered guidance (Christensen et al 2012). I present results throughout the paper using both samples of matched guidance.…”

Section: Matched Samplesmentioning

confidence: 99%

Spreading the Word: Capital Market Consequences of Business Press Coverage of Management Earnings Guidance

Twedt

2012

SSRN Journal

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This study investigates the role of the business press in disseminating management earnings guidance news to capital market participants. Using a unique sample of over 55,000 articles that relate specifically to management guidance, I find that 48 percent of all guidance receives coverage in the business press, with substantial within-firm variation. I then identify firm and guidance characteristics that are associated with the likelihood that guidance receives press coverage. Controlling for the endogeneity of press coverage, I find that dissemination in the press has a significant impact on the market reaction to guidance, and this effect is economically large. This study is the first to provide evidence that there is systematic variation in the extent to which guidance news is disseminated through the press, and that this variation has a significant effect on the market consequences of guidance. iii ACKNOWLEDGEMENTS I am indebted to my dissertation committee, Lynn Rees (chair), Senyo Tse, Nathan Sharp, and Scott Lee for their suggestions and insights. I thank Steve Baginski, Linda Bamber,

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Optimistic Reporting and Pessimistic Investing: Do Pro Forma Earnings Disclosures Attract Short Sellers?

Cited by 88 publications

References 81 publications

Short Selling and Corporate Tax Avoidance

Short Selling and Corporate Tax Avoidance

Non‐GAAP reporting: Evidence from academia and current practice

Spreading the Word: Capital Market Consequences of Business Press Coverage of Management Earnings Guidance

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