Non-GAAP earnings and stock price crash risk

• Main Authors: HSU, Charles, WANG, Rencheng, WHIPPLE, Benjamin C.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Non-GAAP earnings; Stock price crash risk; Disclosure; Regulation; Accounting; Portfolio and Security Analysis
• 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
• Institution: Singapore Management University

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.