Role of stock price informativeness in shaping non-GAAP earnings disclosures

ABSTRACT Using 107,411 firm-quarter observations from 2004 to 2017, we find that managers are less likely to report non-GAAP earnings with the increase of stock price informativeness, suggesting that information from stock prices discourages non-GAAP reporting from firm managers. We further show that stock price informativeness influences managerial incentive of non-GAAP reporting through two channels: (a) direct monitoring and (b) the improvement in the information environment. Accordingly, we find that the constraining effect is more pronounced when a firm’s monitoring mechanisms are weak and when the pre-disclosure information environments are poor. In addition, we find that the quality of non-GAAP earnings improves with the increase of stock price informativeness. Collectively, our results are consistent with the notion that information from the secondary stock price plays an important role in guiding managerial non-GAAP earnings disclosures.