Look at almost any earnings press release and you’ll find standard accounting numbers like net income, earnings per share, and even sales buried under an avalanche of alternative views. Companies often say these alternative numbers provide a broader picture of a company’s performance rather than those required by Generally Accepted Accounting Principles, the regulatory standard for U.S.-listed companies.
To prevent companies from misleading investors, the Securities and Exchange Commission regulates how alternative indicators are presented. But research by Chicago Booth’s Charles McClure and Anastasia A. Zakolyukina suggests that these non-GAAP measures may serve a useful function for investors. Managers may use the dual presentation of GAAP and non-GAAP measures to support decisions to invest more, which may result in higher amounts invested. Basic corporate values.
Efforts to curb the proliferation of misleading alternate numbers are in their 30th year. The Sarbanes-Oxley Act of 2002 created Regulation G, and the SEC issued updated guidance in May 2016. Since then, numerous companies have received SEC comment letters and, in some cases, the SEC’s Enforcement Division has filed regulatory sanctions.
However, companies still report non-GAAP financial results adjusted for non-recurring items that can distort investor perceptions.According to data provider calc bench, most large public companies use non-GAAP disclosures, which almost always tell a more positive story than comparable GAAP numbers. The media also tends to compare adjusted earnings to analysts’ non-GAAP forecasts.
Mr. McClure and Mr. Zakolyukina sought to evaluate the strengths and weaknesses of non-GAAP reporting. Since we cannot directly observe manager choices, we estimate a dynamic model that explicitly incorporates manager optimal choices and investors’ pricing decisions. The model examines the trade-off between noisy GAAP earnings and less noisy but potentially biased non-GAAP earnings, answering “what if” questions and completely eliminating non-GAAP earnings. We are trying to assess the impact of banning or eliminating opportunistic bias in non-GAAP earnings. . In answering these questions, the model takes into account, for example, how much a manager’s incentives depend on his current stock price and how much weight investors place on his GAAP versus non-GAAP earnings. will be done. This approach could help regulators understand the impact of potential rule changes and regulatory enforcement, the researchers wrote.
