No. 1: Are pre-restatement non-GAAP reporting choices determinants of market reactions to material GAAP restatements?

Abstract

We examine whether firms’ decision to report non-GAAP earnings before material GAAP restatements influences the market’s response to these restatements. Our results demonstrate that market reactions to material GAAP restatements are less negative when companies (a) voluntarily disclosed non-GAAP earnings alongside GAAP earnings (+1.5 percentage points), and (b) transformed a GAAP loss into a non-GAAP profit (+2.3 percentage points) before the restatement. However, we observe more negative market reactions when management excluded more expenses than analysts (–3.2 percentage points). Our findings indicate that pre-restatement non-GAAP reporting choices can have opposing effects on how investors perceive financial reporting quality events. Additionally, voluntary non-GAAP disclosure may buffer against negative market reactions to material GAAP restatements. Ultimately, we find that investors alter their treatment of non-GAAP earnings following a material GAAP restatement, suggesting a cascading (i.e., spillover) effect between the perceived quality of GAAP and non-GAAP reporting.