Effects of winsorization: The cases of forecasting non-GAAP and GAAP earnings

Non-GAAP Earnings for Contracting and Financial Disclosure

We explore how the internal use of non-GAAP performance metrics in compensation contracting relates to the disclosure of non-GAAP earnings to external stakeholders. Ex ante, it is unclear why information useful in contracting would be informative for valuation purposes unless a firm’s compensation and financial disclosure processes are related. We explore this relation using a large hand-collec...

The Effects of the Media on the Discrepancy Between GAAP and Pro Forma Earnings

Credit Rating Agency and Equity Analysts’ Adjustments to GAAP Earnings

Moody’s analysts and sell-side equity analysts adjust GAAP earnings as part of their research. We show that adjusted earnings definitions of Moody’s analysts are significantly lower than those of equity analysts when companies exhibit higher downside risk, as measured by volatility in idiosyncratic stock returns, volatility in negative market returns, poor earnings, and loss status. Relative to...

The valuation impact of reconciling pro forma earnings to GAAP earnings

Regulation G requires all companies to quantitatively reconcile pro forma earnings with GAAP earnings. This paper provides three findings related to the impact of reconciliations on mispricing of pro forma earnings. First, prior to Reg G, we find that mis-pricing of pro forma earnings is limited to firms with low reconciliation quality. There is no evidence of mispricing for firms with high rec...

The Effect of Voluntary Clawback Adoption on Non-GAAP Reporting

In this paper, we examine the effect of voluntary adoption of clawback provision on non-GAAP earnings disclosures. The extant literature documents that the voluntary adoption of clawback provisions improves financial reporting quality by increasing the costs of misstating GAAP earnings. However, managers may respond to perception of reduced discretion over GAAP reporting by increasing their rel...