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Does the Takeover Market Deter Opportunistic Non-GAAP Reporting?

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Title:Does the Takeover Market Deter Opportunistic Non-GAAP Reporting?
Authors:David Godsell
Luke Phelps
Keywords:non-GAAP earnings
mergers and acquisitions
corporate control
Date Issued:31 Aug 2019
Abstract:We exploit the Foreign Investment and National Security Act (FINSA) to examine the effect of an important managerial disciplining mechanism, the takeover market, on the quality of non-GAAP reporting. FINSA significantly reduced the likelihood of takeover for a large fraction of the CRSP-Compustat universe. We draw inferences using a difference-in-differences research design by contrasting non-GAAP disclosures by FINSAaffected firms with those of unaffected firms, before and after FINSA. We find that FINSA-affected firms more often exclude recurring expenses, more often exclude expenses incremental to those excluded by analysts, and more often use non-GAAP earnings to convert a GAAP-based miss of an earnings forecast to a beat, after FINSA. This effect accentuates predictably with the extent to which FINSA-affected firms are susceptible to the takeover market in the pre-FINSA period, and with the extent to which non-GAAP earnings determine manager compensation. We conclude by documenting a decline in non-GAAP earnings persistence and the value-relevance of non-GAAP earnings after FINSA. Our evidence demonstrates the role of the takeover market in curbing opportunistic non-GAAP reporting.
Appears in Collections: 06 Financial: Determinants and Consequences of Financial Reporting Quality

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