Signaling financial performance with alternative performance measures

Description

We apply signaling theory to explain the voluntary disclosure of alternative performance measures (APMs) in earnings announcement press releases of European firms. As APMs are voluntary metrics that are neither audited nor regulated, they may be used by management to strategically communicate favorable information about firm performance. We argue that the use of APMs to strengthen performance signals varies with both capital market pressures and product market competition. While capital markets incentivize managers to signal strong performance, competition can either increase APM-based signaling to demonstrate competitive advantage or reduce such signaling when the associated costs are too high. We hand-collect data on APM disclosures by the largest industrial firms in Europe. Our findings indicate that the strength of APM-based signaling increases with capital market pressure—particularly when firms fail to meet earnings benchmarks based on accounting measures. Furthermore, the strength of the signal is positively associated with the level of industry competition, but only for high-performing firms. In highly competitive environments, the cost of disclosing misleading signals is too high for poorly performing firms.

Publication Date

1-1-2016

Keywords

Pro forma earnings, Non-GAAP earnings, Signal cost, Product market competition

Conference

Accounting and Finance Research Forum University of Western Australia, December 2016

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