Two Essays on Non-GAAP Reporting

Hinton, Matthew
Zhou, Jian
Business Administration
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Essay #1: SEC Investigations and Opportunistic Non-GAAP ReportingAbstract: This study examines whether an investigation by the United States Securities and Exchange Commission (SEC) affects a firm’s non-GAAP reporting choices and a potential mechanism for the effect, Turnover-Performance Sensitivity (TPS). Using a list of all closed SEC investigations between January 1, 2000 and August 2, 2017 provided by Blackburne et al. (2021), I examine my research question. I find that, when under an SEC investigation, firms with opportunistic motives increase their non-GAAP reporting, while those with informative motives reduce their opportunistic non-GAAP reporting. Further, I find TPS increases for firms with opportunistic motives that are under investigation and that opportunistic non-GAAP reporting choices exacerbate this effect. Opportunistic firms also have less persistent non-GAAP earnings during an SEC investigation. Conversely, firms with informative motives do not see such a change to TPS. I also find that the effect of an investigation on opportunistic reporting is stronger for (i) informative firms in the post-financial crisis period, (ii) firms that have a high level of financial expertise on the board of directors and the nomination committee, (iii) firms with dual board chair-CEO positions, and (iv) firms with low Earnings Response Coefficients (ERC). This paper has implications for regulators and investors, as my research shows that SEC interventions have unintended consequences related to opportunistic non-GAAP reporting and managers’ career prospects. Essay #2: Firm-Level Political Risk and Opportunistic Non-GAAP Reporting Abstract: Firm-level political risk is the likelihood a firm will face losses due to political factors and can influence investment and other aspects of firm behavior. I examine the effect of firm-level political risk on opportunistic non-GAAP reporting using the novel political risk measure developed by Hassan et al. (2019). Using 129,937 firm-quarter observations between 2003 and 2020, I find that firms with opportunistic motives are less likely to report non-GAAP earnings opportunistically as political risk increases. Also, I find that non-GAAP earnings are more persistent for opportunistic firms when political risk is high. However, I do not find these effects for firms with informative motives. In additional analysis, I find that economic policy risk has the strongest effect on non-GAAP reporting among eight topic-specific measures. I also find evidence that the effect of political risk is stronger following the 2007-2008 financial crisis and during the COVID-19 pandemic. This study has implications for regulators, investors, and analysts. Regulators can apply pressure on firms to reduce opportunistic behaviors and investors and analysts should be wary of non-GAAP reporting for firms with low levels of political risk.
Accounting, disclosure prominence, non-GAAP earnings, political risk, SEC investigations, turnover, turnover-performance sensitivity
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