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Industry competition and signaling financial performance with non-gaap earnings
American Accounting Association Annual Meeting 2019
Year (definitive publication)
2019
Language
English
Country
United States of America
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Abstract
We explore how product market competition affects managers’ use of non-GAAP
earnings to signal financial performance. Using hand-collected data for large European
firms, we find that the non-GAAP earnings signal conveyed by managers (i.e. the
difference between non-GAAP and GAAP earnings) is higher when competition is
strong. Moreover, we show that in strong competitive environments firms with low
GAAP performance increase less their non-GAAP earnings signal than firms with high
GAAP performance. Low performing firms continue to experience below industry
performance in subsequent periods, thus the non-GAAP signal appear to be consistent
with their expected weak future performance. These findings are in line with a signaling
cost argument; industry competition can restrain aggressive non-GAAP reporting as false
signals about current and future earnings performance may induce the entrance of new
competitors or overproduction by existing ones, reducing the firm’s low income even
further.
Acknowledgements
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Keywords
Non-GAAP,Product market competition,Industry effects,Signaling
Fields of Science and Technology Classification
- Economics and Business - Social Sciences
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