Time to call noise control? The determinants of non-GAAP earnings disclosure in New Zealand and IFRS adoption

Abstract

I hand-collect non-GAAP earnings disclosures made by New Zealand firms to consider whether the characteristics of disclosers are consistent with informative or opportunistic (turning up the noise) disclosure incentives. I find evidence that both types of incentives are important. Commentators frequently suggest that firms informatively disclose non-GAAP earnings because IFRS fails to adequately capture underlying performance. I find that IFRS is associated with an increased probability of non-GAAP earnings disclosure; and an increased probability that disclosers will provide high-quality reconciliations, whereas opportunistically-linked firm characteristics are negatively associated with reconciliation quality. One interpretation is that this corroborates commentators’ arguments. The Financial Market Authority provides guidance on the best disclosure practices; however, I fail to find evidence that opportunistically-linked firm characteristics are less likely to shape non-GAAP disclosure after the introduction of this guidance. Conversely, this guidance is positively associated with reconciliation quality which could imply that some latent reduction in opportunism has occurred. Some informatively-linked firm characteristics are positively associated with reconciliation quality, while others are negatively associated. Evidence suggests that the emphasis placed on non-GAAP earnings is a function of both informativeness and opportunism. This suggests that any regulatory restrictions constraining the disclosure or emphasis of non-GAAP earnings or demanding high-quality reconciliations (‘calling noise control’) would be likely to restrict the practices of both informative and opportunistic disclosers. Lastly, while there is limited evidence that the decision to disclose well-defined, commonly-used non-GAAP earnings metrics (EB metrics) has the potential to be opportunistically motivated, evidence suggests these measures are opportunistically emphasised. This warrants concern about the use of all forms of non-GAAP earnings.