An empirical analysis of non-GAAP measures for high-litigation-risk industries

Baizhou Chen, Robert Houmes and Daphne Wang

Advances in accounting, 2025, vol. 68, issue C

Abstract: This study empirically examines the effects of litigation risk on the likelihood and quality of non-GAAP reporting. Results suggest that firms in industries with a high incidence of litigation are more likely to disclose non-GAAP earnings than those in other industries, while the extent of the non-GAAP exclusion per share (the magnitude of the difference between non-GAAP earnings and GAAP earnings) decreases for high-litigation-risk firms. In addition, we investigate the relations between the extent of non-GAAP reporting during two distinct periods of financial stress: the financial crisis of 2008–2009 and the COVID-19 pandemic year of 2020. Results of these tests show that while the magnitude of non-GAAP exclusions generally increased during these periods, exclusions for high-litigation-risk firms were lower relative to other industries. We rationalize these findings by asserting that litigation risk incentivizes managers to disclose high-quality non-GAAP earnings.

Keywords: Non-GAAP earnings; Litigation risk; Regulation G; Earnings management; Safe harbor; Financial crisis; COVID-19 pandemic (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:68:y:2025:i:c:s0882611025000082

DOI: 10.1016/j.adiac.2025.100813

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