Non-GAAP reporting following debt covenant violations

Theodore E. Christensen (), Hang Pei (), Spencer R. Pierce () and Liang Tan ()
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Theodore E. Christensen: University of Georgia
Hang Pei: California State University, San Bernardino
Spencer R. Pierce: Florida State University
Liang Tan: Virginia Polytechnic Institute and State University

Review of Accounting Studies, 2019, vol. 24, issue 2, No 8, 629-664

Abstract: Abstract We investigate whether firms change their non-GAAP reporting practices after debt covenant violations. We find that the likelihood that a firm will disclose non-GAAP earnings decreases and (for those that continue to disclose) the quality of non-GAAP reporting improves following covenant violations, consistent with stronger shareholder monitoring during this period of scrutiny. Consistent with increased monitoring following a debt covenant violation, cross-sectional analyses indicate that these changes in non-GAAP reporting are concentrated among firms with strong governance. Moreover, we find that investor demand for disclosure (proxied by analyst-provided non-GAAP performance metrics and EDGAR search volume) increases following a covenant violation. Collectively, our evidence is consistent with heightened investor scrutiny following covenant violations, and it casts doubt on the competing explanation that shareholders delegate monitoring to creditors following a covenant violation. Overall, our evidence provides new insights on the determinants of firms’ non-GAAP reporting practices and an alternative view about how debt covenant violations influence voluntary disclosure.

Keywords: Non-GAAP earnings; Debt covenant violation; Corporate governance (search for similar items in EconPapers)
JEL-codes: D83 G32 M40 M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (12)

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DOI: 10.1007/s11142-019-09492-1

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