Do Investors Respond Differently to Non-GAAP Earnings After Material GAAP Restatements?
Dr. Christian Sofilkanitsch, Professor at NUGSB
This study examines how investors interpret non-GAAP earnings, which are performance measures companies voluntarily report alongside mandatory GAAP earnings.
While non-GAAP earnings are often presented as a clearer view of firms’ sustainable performance, they are also subject to managerial discretion and have been a topic of debate among regulators and researchers. The key question the author addresses is whether investors continue to rely on these voluntary measures when the credibility of the underlying GAAP reporting is called into question.
The study analyzes how investors’ reactions to non-GAAP earnings change after companies announce material financial restatements, which reveal that previously reported GAAP numbers were incorrect. These events serve as a natural setting in which trust in financial reporting is disrupted. Using an event-study approach, it was found that investors respond significantly less to non-GAAP earnings after such restatements.
In particular, the market reaction to non-GAAP earnings declines by about 40 percent, indicating that investors view these measures as less informative once confidence in the firm’s mandatory financial reporting is shaken.
The findings suggest that credibility “spills over” across reporting frameworks. Even though non-GAAP earnings are voluntary disclosures, their perceived reliability depends on the integrity of the underlying GAAP numbers. When that foundation is compromised, investors become more skeptical of alternative performance measures.
Overall, the study highlights how closely linked different forms of financial reporting are and underscores the importance of maintaining trust in accounting systems.