بررسی اثرات مقررات SEC افشای غیر GAAP

Rules implemented by the U.S. Securities and Exchange Commission in 2003 impose additional disclosure and filing requirements on firms publicly disclosing non-GAAP earnings. We find the regulations produced (1) modest declines in the frequency of special- and other-item exclusions, (2) a decline in exclusion magnitude, (3) a modest decline in the probability disclosed earnings meet or beat forecasts, and (4) a decline in the association between returns and forecast errors. Our results suggest that, while the regulations reduced firms’ use of non-GAAP disclosures to improve performance perceptions, they also reduced firms’ willingness to use non-GAAP earnings to convey permanent earnings.

While corporate managers often claim non-GAAP earnings disclosures help them convey permanent earnings, there has been much concern that managers also use non-GAAP earnings to opportunistically portray their performance.1 Section 401(b) of Sarbanes–Oxley (SOX) (Public Law 107-204) directs the U.S. Securities and Exchange Commission (SEC) to establish rules regulating ‘pro forma’ (i.e. non-GAAP) earnings disclosures. Accordingly, the SEC proposed, in November 2002, and implemented, in March 2003, new non-GAAP earnings disclosure rules. The new rules require that, if a firm discloses non-GAAP earnings in any public communication, it must also (a) disclose the most directly comparable GAAP earnings number, (b) disclose a reconciliation of the non-GAAP number to the GAAP number, and (c) furnish, within 5 days, a Form 8-K containing an explanation of why management believes the non-GAAP number is useful to investors. In this paper, we assess the consequences of the regulations along several dimensions. We find the regulations produced (1) a modest decline in non-GAAP earnings disclosures, (2) a decline in the magnitude of GAAP–non-GAAP earnings differences (i.e. exclusion magnitudes), (3) a modest decline in the probability firms disclose earnings that meet or beat forecasts, and (4) a decline in the association between returns and earnings forecast errors. We partition exclusions into special- and non-special-item (i.e. ‘other-item’) exclusions, and find the regulations reduced the frequency and magnitude of both. However, we find the regulations reduced meeting-or-beating analysts’ forecasts only when firms exclude other items. Our results suggest the following interpretations. The declines we find in non-GAAP disclosure frequency and exclusion magnitude suggest the regulations have increased managerial focus on GAAP earnings. A regulation-induced decline in meeting-or-beating forecasts when firms exclude other-items suggests that, prior to the regulations, managers were using other-item exclusions to help them meet or beat and that the regulations have helped curtail this behavior. Other studies’ results (e.g. Doyle et al., 2003; Kolev et al., 2008) suggest other-item exclusions are more opportunistic than special-item exclusions. Our results generally support that inference. Importantly though, our analyses of exclusion types provide some evidence of an unintended consequence. Quarters in which firms experience special items are presumably those where non-GAAP earnings could be most useful in communicating permanent earnings. As we explain in Section 2, the regulations place restrictions on a firm's ability to exclude transitory income components and potentially make excluding such items more costly. Our results suggest the regulations motivated a reduction in exclusions of special items, which are more transitory (Elliott and Hanna, 1996; Burgstahler et al., 2002). The decline we find in the association between returns and earnings forecast errors is consistent with (1) a shift toward GAAP-based forecast errors (Bradshaw and Sloan, 2002) that contain more transitory components, like special items, and (2) the effect of the shift toward GAAP-based forecast errors dominating the potential effect of any increase in earnings precision resulting from reduced opportunism. A growing number of other papers address the consequences of the regulations. Using a smaller, hand-collected sample, Marques (2006) finds a decline in non-GAAP disclosure frequency after the SEC regulations. Marques (2006) also finds little or no change in earnings–return relations due to the regulations. In contrast, Yi (2007) concludes that the association between 3-day announcement period returns and non-GAAP earnings increases and that the association between exclusions and future stock returns declines after the regulations. Kolev et al. (2008) find the association between other-item exclusions and future operating income declines after the regulations but that the association between future operating income and special-item exclusions increases. Like Marques (2006), Entwistle et al. (2006) use a smaller sample of hand-collected non-GAAP earnings disclosures and, in univariate analyses, find declines in the frequency of non-GAAP earnings disclosures and in exclusion magnitudes, but an increase in special-item exclusions. Bowen et al. (2005) find increasing emphasis on GAAP earnings in early 2001 following an SEC warning and enforcement action concerning non-GAAP disclosures. Our study offers several contributions beyond these studies. First and foremost, ours is the only study to assess the impact of the regulations on meeting-or-beating analysts’ earnings forecasts and thus the only study to provide evidence that the regulations reduced meeting-or-beating. Second, we provide a comprehensive analysis of exclusion types and magnitudes (see also Entwistle et al., 2006). Our results suggest that an analysis of the effect of the regulations on only non-GAAP frequency understates the impact of the regulations and we provide new evidence regarding special- versus other-item exclusions. Third, unlike other studies, ours suggests a post-regulation decline in investor pricing of earnings forecast errors, which we attribute to a change in the nature of the forecast errors, as post-regulation disclosed earnings are more frequently GAAP-based and include more special items that are likely to be transitory. Overall, our comprehensive analysis of the consequences of the regulations for firms’ non-GAAP disclosure decisions suggests they have produced changes mostly, but not entirely, consistent with SEC intentions. We caution that a limitation of our empirical design (inherent in virtually all research on regulatory events) is the alignment of event and calendar time. Additionally, because non-GAAP reporting is a relatively recent phenomenon, we must work with a relatively short time series. Although we construct our tests to minimize the consequences of these limitations, we cannot rule out the possibility our results are due to some factor we have failed to adequately control. Section 2 provides background on non-GAAP reporting including regulatory changes and legislative actions. Section 3 describes our sample selection process and variable measurement. 4 and 5 discuss our analyses of non-GAAP disclosure frequency and exclusion magnitude, respectively. Section 6 discusses our analyses of the new rules’ impact on meeting-or-beating analysts’ forecasts. Section 7 presents our analyses of the pricing of disclosed earnings. Section 8 concludes. 2. Recent regulatory changes potentially affecting disclosures of non-GAAP earnings Regulation of non-GAAP earnings disclosures began with the SEC's ‘cautionary advice’ on December 4, 2001, in which the SEC noted that non-GAAP (or “pro forma”) financial information carries “no defined meaning and no uniform characteristics”, may “mislead investors if it obscures GAAP results”, and could violate the anti-fraud provisions of existing Securities Laws (SEC, 2001). On January 16, 2002, the SEC brought an enforcement action against Trump Hotels & Casino Resorts Inc. charging that the company's third-quarter 1999 earnings release was misleading because disclosed earnings included an undisclosed special gain but excluded a special loss (SEC, 2002). Section 401(b) of the SOX Act directs the SEC to establish rules regulating disclosures of non-GAAP financial measures. Accordingly, on November 5, 2002, the SEC proposed, and on January 22, 2003, finalized new rules, which took effect on March 28, 2003 (SEC, 2003). Thus, we focus our analyses of the impact of the new regulations on disclosures of first quarter 2003 and later earnings, relative to prior earnings disclosures. However, because of the events we describe above and others we describe in Section 4, we implement controls for possible changes in non-GAAP earnings disclosures occurring during 2002.2 The new rules include Regulation G, amendments to Item 10 of Regulation S-K, and the addition of Item 12 to Form 8-K. Regulation G mandates that public disclosures containing a non-GAAP earnings number (1) must contain the most directly comparable GAAP number, (2) must contain a clearly understandable quantitative reconciliation of the non-GAAP number to the most directly comparable GAAP number, and (3) may not present non-GAAP earnings in ways that mislead investors. Item 12 of form 8-K requires that companies file a Form 8-K within 5 business days of any public disclosure of annual or quarterly operating results. The form must include the text of the public disclosure and, if the public disclosure contains a non-GAAP financial measure, the 8-K must (1) present the most directly comparable GAAP measure with equal or greater prominence, (2) disclose the reasons why management believes the non-GAAP measure provides investors useful information, and (3) describe whether and how management uses the non-GAAP measure. The amendments to Item 10 of Regulation S-K prohibit, from filings such as 10-Qs and 10-Ks but not 8-Ks, non-GAAP financial measures that exclude ‘non-recurring’ items, if the firm reports or is likely to report the same or similar items in the previous or following 2 years (see Clarke et al., 2003 for additional details). There are at least two reasons managers disclose non-GAAP earnings. First, managers can improve performance perceptions through non-GAAP earnings disclosures by excluding expenses analysts do not exclude from their forecasts. For example, analysts might forecast earnings excluding intangible amortization and deferred compensation expense, but managers disclose earnings excluding intangible amortization, deferred compensation expense, and some portion of accrued compensation. Doyle and Soliman (2005) find evidence of this type of disclosure practice. We refer to these as opportunistic non-GAAP earnings disclosures.3 Second, firms may also disclose non-GAAP earnings to more effectively communicate permanent earnings. For example, Lougee and Marquardt (2004) find non-GAAP earnings help predict future profitability when GAAP earnings informativeness is low and that low-earnings-informativeness firms more likely disclose non-GAAP numbers. Bradshaw and Sloan (2002) and Lougee and Marquardt (2004) provide evidence that investors find non-GAAP earnings more informative. The regulations potentially affect both opportunistic and non-opportunistic non-GAAP disclosures. The intent of the reconciliation and management-explanation provisions of the regulations is to make opportunistic non-GAAP disclosures transparent and costly (e.g. SEC enforcement actions, capital markets consequences, and managerial reputation damage). Karpoff et al. (2008) document that the costs associated with SEC enforcement actions are substantial, with reputation damage likely generating the bulk of those costs. However, because the regulations provide no means to remedy an accidental violation (e.g. the regulations apply to verbal as well as written communication) and because of the additional administrative burdens, the regulations also potentially raise the cost of non-opportunistic non-GAAP disclosures.

In this paper, we assess various consequences of the SEC's non-GAAP disclosure rules, resulting from the Sarbanes–Oxley Act of 2002. We summarize our evidence as follows. The regulations produced (1) a modest decline in non-GAAP earnings disclosures, (2) a decline in the magnitude of GAAP–non-GAAP earnings differences (i.e. exclusion magnitudes), (3) a modest decline in the probability firms disclose earnings that meet or beat forecasts, and (4) a decline in the association between returns and earnings forecast errors. After partitioning exclusions into special-item and non-special-item (i.e. ‘other-item’) exclusions, we find that the regulations reduced the frequency and magnitude of both special- and other-item exclusions. We find the regulations reduced meeting-or-beating analysts’ forecasts only when firms exclude other items. Overall, our evidence suggests the regulations have reduced the opportunistic use of non-GAAP earnings disclosures, which is likely consistent with the intentions of legislators and regulators. Additionally, our evidence suggests the regulations have interrupted the upward trend in non-GAAP reporting documented by prior research (e.g. Bradshaw and Sloan, 2002), interrupted the trend in meeting-or-beating forecasts (e.g. Brown and Caylor, 2005), and have increased the emphasis managers and analysts place on GAAP earnings. However, our evidence of reduced non-GAAP earnings disclosures when firms experience special items and reduced investor weight on earnings forecast errors seems unlikely consistent with legislator and regulator intentions.