The impact of the global financial crisis on the comparative value relevance of GAAP versus non-GAAP earnings
Creators: name: Teh, Seng Thiam
Publisher: name: The Australian National University
Year: 2014
Subjects: subject: Accounting Standards
subject: Global Financial Crisis, 2008-2009
subject: Earnings management
subject: Valuation

description: I examine the value relevance of earnings measures based on generally accepted accounting principles (GAAP) relative to non-GAAP earnings measures using six earnings measures: I/B/E/S earnings; Standard &amp; Poor's Core earnings; cash earnings; cash flows from operations; earnings from operations adjusted to exclude special items; and income before extraordinary items. I adopt the Ohlson (1995; 1999) valuation model to test value relevance and a cumulative abnormal returns model to test the information content of these alternative earnings measures. Prior studies consistently show non-GAAP earnings are significantly more value relevant than GAAP earnings (Bradshaw and Sloan, 2002; Bhattacharya et al., 2003; Brown and Sivakumar, 2003; Albring et al., 2010) and that information risk is priced by investors (Easley and O'Hara, 2004) Therefore, factors that impact on information risk, such as, information asymmetry, earnings quality and conservatism, may affect the value relevance of GAAP and non-GAAP earnings. However, prior studies do not examine the impact of these factors on the relative and incremental value relevance GAAP versus non-GAAP earnings. I separately control and test for the impact of information asymmetry, earnings quality and conservatism on the comparative value relevance of GAAP and non-GAAP earnings. Furthermore, I argue that firm size may impact on the value relevance of GAAP and non-GAAP earnings. In addition, industry may have an effect on the value relevance of earnings, particularly for firms in the financial sector because of their capital structure and regulatory environment. However, prior studies do not investigate the impact of financial and non-financial firms and of size on the value relevance and informativeness of GAAP and non-GAAP earnings. I consider these issues by separately analysing samples of financial, non-financial, S&amp;P 500 and non-S&amp;P 500 firms. Prior studies generally present evidence from before the GFC and there is no published research on the value relevance of these earnings metrics that examine the impact of the GFC. Therefore, I examine the impact of the GFC on the value relevance of GAAP and non-GAAP earnings measures before, during and after the GFC. Additionally, prior research focuses on GAAP earnings and pro forma or I/B/E/S earnings. As mentioned above, I use six earnings measures. My sample is drawn from US publicly traded firms between 2002 and 2012. My results indicate that GAAP earnings are incrementally value relevant and that non-GAAP earnings are not consistently more value relevant than GAAP earnings. I find evidence that information asymmetry, earnings quality and conservatism are systematically related to the comparative value relevance of GAAP and non-GAAP earnings. I also find that sample selection impacts on the findings. In addition, investors shift their emphasis on GAAP and non-GAAP earnings over time as a consequence of the GFC and investors generally place greater emphasis on the book value of equity in pricing shares. My findings highlight the fluid nature of the relative emphasis investors place on alternative earnings measures. They provide insights on the impact of information asymmetry, earnings quality and conservatism, and of the GFC on the emphasis investors place on earnings information.