SEC Comment Letters on Firms’ Use of Non-GAAP Measures: The Determinants and Firms’ Responses

41 Pages Posted: 27 Apr 2020 Last revised: 4 May 2020

See all articles by Koren M. Jo

Koren M. Jo

Hong Kong Polytechnic University - School of Accounting and Finance

Shuo Yang

Hong Kong Polytechnic University

Date Written: November 1, 2019

Abstract

This paper explores Securities and Exchange Commission comment letters that address firms’ use of non-Generally Accepted Accounting Principles (GAAP) measures in 10-Ks, 10-Qs, and earnings releases. We investigate the determinants of firms’ receiving non-GAAP comments and the revisions to non-GAAP reporting undertaken by these recipients. Firms that experience poor GAAP performance and emphasize non-GAAP measures are more likely to receive non-GAAP comments. Recipients of non-GAAP comments are more likely than other reviewed firms to abandon non-GAAP measures in future filings. When recipients of non-GAAP comments continue to report non-GAAP measures, they provide more justifications for the use and reduce the prominence of these measures. However, higher non-GAAP earnings and GAAP earnings differentials do not appear to attract non-GAAP comments. In addition, the amount of non-GAAP exclusions does not decrease after the receipt of non-GAAP comments. Overall, our findings suggest that non-GAAP comments are effective in deemphasizing non-GAAP measures.

Keywords: Comment Letter, Non-GAAP, Earnings Release

JEL Classification: M41, M48

Suggested Citation

Jo, Koren M. and Yang, Shuo, SEC Comment Letters on Firms’ Use of Non-GAAP Measures: The Determinants and Firms’ Responses (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3565868 or http://dx.doi.org/10.2139/ssrn.3565868

Koren M. Jo

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Shuo Yang (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon
Hong Kong

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