The informativeness of non-GAAP earnings after Regulation G?

Abstract

This study explores the possibility that managers mislead investor perceptions through the disclosure of non-GAAP earnings even after SEC intervention (Reg G). We find that, on average, some higher qualities of exclusions, such as nonrecurring items, are moved from GAAP earnings to arrive at non-GAAP earnings. However, net income-decreasing other exclusions most related to recurring items are negatively associated with future operating income. Thus, managers still manipulate non-GAAP earnings to exclude certain recurring items from non-GAAP earnings even when reporting on the reconciliation table. We further use CEO and CFO selling shares as the key factor to test whether top executives convey good information to affect the firm's stock, and then mislead investors through disclosing non-GAAP earnings. We find that a CEO or CFO who sells their shares during the two weeks after the earnings announcement date is more likely to disclose non-GAAP earnings. Additionally, the negative correlations between other exclusions and future operating incomes for cases with executives’ sales are more significant than those for cases without executives’ sales. That is, even after SEC intervention, managers may disclose non-GAAP earnings to mislead investors' and garner private benefits.