SEC Non-GAAP Comment Letters and Firm Disclosures

Abstract

Is the SEC’s non-GAAP comment letter process effective? Specifically, what are the determinants of non-GAAP comment letters and how do managers respond? We find that the SEC issues comment letters to firms with larger differences between Street and GAAP earnings, but is less likely to issue to firms with Big 4 auditors. Managers respond by issuing longer earnings announcements that are more difficult to read. Importantly, managers do not reduce the strategic nature of non-GAAP reporting (that is, there are no reductions in differences between Street and GAAP earnings nor the likelihood of meeting or beating analyst forecasts). Perhaps most importantly, firms receiving non-GAAP comment letters are more likely to receive non-GAAP comment letters again in the following three years, but are not more likely to receive GAAP comment letters, consistent with ongoing noncompliance in non-GAAP disclosures. These results should be of interest to both academics and regulators interested in non-GAAP comment letters.