The impact of product recalls on Non-GAAP reporting decisions

Abstract

We examine whether product recalls impact the likelihood of disclosure and quality of non-GAAP earnings. With increased scrutiny, firms may limit voluntary disclosures or use them to counteract negative publicity. Similarly, product recalls could motivate firms to report higher-quality non-GAAP earnings to provide a more accurate view of the financial impact of product recalls or report more aggressive non-GAAP earnings to counteract the decline in financial performance. Using a sample period of 2004 to 2017, we find that firms are less likely to disclose non-GAAP earnings after announcing a product recall. For firms that choose to release non-GAAP earnings after announcing a product recall, we find that the quality of non-GAAP earnings improves. This finding suggests that product recalls may prompt firms to adopt more conservative reporting practices, both in terms of the likelihood and quality of disclosures. Our study provides insights into firms’ strategic disclosure decisions and highlights the nuanced ways firms manage non-GAAP disclosures to navigate the challenges posed by product recalls.