| I examine whether the documented decreased frequency of non-GAAP earnings disclosures post-Regulation G (e.g., Heflin and Hsu 2005, Marques 2005, National Investors Relations Institute 2003) is evidence that the Sarbanes-Oxley Act of 2002 has achieved one of its key disclosure objectives relating to non-GAAP earnings disclosures. The intent of Congress and the SEC in issuing Regulation G was to improve the transparency of non-GAAP earnings, facilitating management's ability to communicate the economic prospects of the firm and diminishing the prospect that management could issue non-GAAP earnings to opportunistically mislead investors about firm performance. Based on 10,896 sample firm-quarters from 2001 to mid 2004, I find that managers of sample firms that have communication motives, proxied by low historical returns-earnings relations, are more likely to disclose non-GAAP earnings in the post-Reg G period than in the pre-Reg G period. In contrast, I find that managers of sample firms that have opportunistic motives, proxied by the firms' GAAP earnings falling short of various earnings' benchmarks, are less likely to do so in the post-Reg G period than in the pre-Reg G period. I also provide evidence that the incremental information content of sample firms' non-GAAP earnings surprises over GAAP earnings surprises is statistically significant only in the post-Reg G period, suggesting that investors' improved perception of the transparency of non-GAAP earnings also is consistent with a decrease in misleading non-GAAP earnings post-Reg G. Overall, the findings of this paper appear consistent with Congress' and the SEC's intervention in pro-forma reporting practices resulting in improvements in the quality of information provided in non-GAAP earnings disclosures. |
