Relative Emphasis on Non-GAAP Earnings in Conference Calls: Determinants and Market Reaction

We use textual analysis to examine whether non-GAAP earnings receive greater emphasis than GAAP earnings in the conference calls that accompany earnings announcements. We measure relative emphasis, i.e. prominence, based on the first appearance or frequency of GAAP and non-GAAP earnings per share (EPS) dollar amounts in the transcripts of conference calls. To complement our analysis of relative emphasis on non-GAAP earnings, we measure general non-GAAP content using frequency counts of keywords. We find that firms place greater relative emphasis on non-GAAP earnings and include more general non-GAAP content when the non-GAAP results exceed the GAAP results, when the non-GAAP results achieve a benchmark that the GAAP results missed, and when the firm’s GAAP earnings are less value-relevant. We find somewhat weak evidence that impression-management motivation is the dominant explanation for greater relative emphasis on non-GAAP earnings but not for general non-GAAP content. Overall, the construct and measurement of relative emphasis on non-GAAP earnings and general non-GAAP content differ, but results indicate they are complements in explaining the market response to earnings conference calls.