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How do financial analysts shape firms’ non-GAAP reporting?

Many firms represent their performance using metrics that do not conform with Generally Accepted Accounting Principles (GAAP). Non-GAAP numbers are not audited and may be prone to being manipulated by managers.

Enrique Gomez and his co-authors study how firms’ reporting of non-GAAP numbers change upon losing analyst coverage due to brokerage closures and mergers. The findings show that firms are more likely to report non-GAAP numbers following drops in analyst coverage. Furthermore, those non-GAAP numbers are found to be more aggressive.

Non-GAAP numbers can be used to provide a clearer representation of a company, but many managers may fabricate them to make their firm look better. These findings suggest financial analysts can play an important role in holding managers accountable for the data they choose to present to investors and regulators.