← Search

The Effect of Investor Inattention on non-GAAP Disclosure

Riddha Basu¹; Spencer Pierce^2,3; Andrew Stephan⁴

¹ George Washington University , United States · ² Florida State University - College of Business Rovetta Business Building Florida State University Florida State University - College of Business UNITED STATES Tallahassee FL 32306-1110 18016360125 · ³ Accounting Rovetta Business Building Florida State University Florida State University - College of Business UNITED STATES Tallahassee FL 32306-1110 18016360125 · ⁴ University of Colorado Boulder UNITED STATES

We examine whether investor inattention influences managers’ non-GAAP earnings disclosures. Hirshleifer and Teoh’s (2003) theoretical model predicts that managers are more likely to disclose upwardly-biased non-GAAP metrics when investors are inattentive. Employing a measure that captures exogenous variation in institutional investor inattention, we find that managers are more likely to provide non-GAAP disclosures, particularly those where non-GAAP earnings are greater than GAAP earnings, when inattention is high. Moreover, inattention is positively associated with the magnitude of non-GAAP exclusions, which suggests managers present better non-GAAP performance to inattentive investors. Consistent with managers exploiting investors’ limited attention, we find that stock prices respond more strongly to non-GAAP exclusions when investors are inattentive and that managers are more likely to respond to inattention with income increasing non-GAAP disclosures if they sell shares following the disclosure. Taken together, these findings suggest that managers respond opportunistically to inattentive institutions by disclosing aggressive non-GAAP earnings metrics.

DOI

10.2308/tar-2022-0154

Language

en

Export

BibTeX

Sources

openalex crossref