CEU Electronic Theses and Dissertations, 2020
| Author | Conrad, Nicole Marie |
|---|---|
| Title | The Implications of US Non-GAAP Reporting on Stock Pricing |
| Summary | The United States stock markets hold critical investments for shareholders. Half of U.S. households keep investments such as essential personal savings, retirement pensions, and employee compensations in the stock markets (NW et al., 2020). The Securities and Exchange Commission (“SEC”) enforces market regulation dictating that these investors must have access to quality information, e.g., reputable corporate earnings information (How the SEC Protects Investors, Maintains Market Integrity, 2000). SEC laws require corporations to publish financial information according to Generally Accepted Accounting Principles (“GAAP”). However, the SEC also allows corporations to publish elective “non-GAAP” earnings numbers each quarter to investors. Because of its discretionary nature, company management can use Non-GAAP reporting to mislead investors. The differences between non-GAAP earnings over GAAP earnings are known as expense exclusions, which management can manipulate to fictitiously increase firm value. Based on research indicating the unreliability of non-GAAP earnings, investors should discount their estimation of future company earnings when expense exclusions are high. However, contrary to my hypothesis, the correlation direction between expense exclusions and stock prices changes with the direction of the stock price change. Investors trust expense exclusions when their perception of the company’s well-being is good, but discount expense exclusions when the opposite is true. Therefore, I conclude that investors are not receiving enough quality information for fair decision-making, so policies need to be altered to give them a more transparent market. This paper seeks to further contribute to research regarding investor evaluation of non-GAAP data. |
| Supervisor | Akbar, Yusaf |
| Department | Economics MA |
| Full text | https://www.etd.ceu.edu/2020/conrad_nicole.pdf |
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