Non-GAAP earnings and stock price crash risk

We investigate whether non-GAAP earnings disclosures increase stock price crash risk. Consistent with non-GAAP disclosures allowing managers to inflate investors’ perceptions about firm performance, our results indicate that income increasing non-GAAP reporting increases crash risk. We also find tha...

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Bibliographic Details
Main Authors: HSU, Charles, WANG, Rencheng, WHIPPLE, Benjamin C.
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2021
Subjects:
Online Access:https://ink.library.smu.edu.sg/soa_research/1843
https://ink.library.smu.edu.sg/context/soa_research/article/2870/viewcontent/SSRN_id3454799.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:We investigate whether non-GAAP earnings disclosures increase stock price crash risk. Consistent with non-GAAP disclosures allowing managers to inflate investors’ perceptions about firm performance, our results indicate that income increasing non-GAAP reporting increases crash risk. We also find that managers can use non-GAAP reporting as a substitute for earnings management to withhold bad news from investors (the traditional explanation for crashes). Finally, we find a positive association between non-GAAP reporting and the likelihood of subsequent events that can trigger a crash. Overall, our evidence is consistent with some non-GAAP disclosures exposing investors to risks of large and sudden price declines.