The paper studies the impact of common ownership on the firms’ non-GAAP reporting. I argue that common owners encourage more non-GAAP reporting to enhance higher earnings comparability and facilitate information transfer across portfolio firms by internalizing the information externality. Consistent with the hypothesis, I find that common ownership increases the non-GAAP reporting probability. The results are robust to endogeneity tests, including a quasi-natural experiment based on financial institution merges and tests based on matched samples. Moreover, the positive effect of common ownership on the firms’ non-GAAP reporting is stronger for firms with lower GAAP earnings comparability, lower product similarity, higher complexity, lower earnings management, and longer investment horiz...[ Read more ]

The paper studies the impact of common ownership on the firms’ non-GAAP reporting. I argue that common owners encourage more non-GAAP reporting to enhance higher earnings comparability and facilitate information transfer across portfolio firms by internalizing the information externality. Consistent with the hypothesis, I find that common ownership increases the non-GAAP reporting probability. The results are robust to endogeneity tests, including a quasi-natural experiment based on financial institution merges and tests based on matched samples. Moreover, the positive effect of common ownership on the firms’ non-GAAP reporting is stronger for firms with lower GAAP earnings comparability, lower product similarity, higher complexity, lower earnings management, and longer investment horizons of common ownership. Finally, I find that common ownership improves the non-GAAP earnings quality. Overall, my study improves the understanding of the role of common ownership in firms’ disclosure decisions.

Keywords: Institutional investor; Common ownership; Non-GAAP earnings; Earnings quality