SEC interventions and the frequency and usefulness of non-GAAP financial measures
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This dissertation examines the effect on both firms and investors of two SEC regulatory interventions related to disclosure of non-GAAP (pro forma) financial measures. The two interventions, a “warning” in late 2001 and Regulation G, adopted in early 2003, define three different regimes that coincide with the three calendar years in the sample (2001 to 2003). The impact on investors is measured by analyzing the frequency and determinants of disclosure of a non-GAAP financial measure in the quarterly earnings’ press releases. The impact on investors is assessed via valuation models and an analysis of the correlation of earnings surprises with abnormal stock returns. Both analyses focus on the existence of a market reaction to the simple act of disclosing a non-GAAP financial measure as well as the way investors react to the magnitude of the adjustments made by both the financial analysts and the firms’ managers. There are four main results. First, after the SEC’s first intervention there is a decrease in the probability of disclosure of non-GAAP financial measures and this decline accelerates after the second SEC intervention. Second, all else equal, investors do not value firms higher or lower because of the disclosure of non-GAAP financial measures. Third, investors accept as generally transitory most of the adjustments to GAAP income made by I/B/E/S financial analysts, but not the additional adjustments made by firms. Finally, the way investors price differences between GAAP and nonGAAP financial measures was not affected by SEC interventions.