How cultural and contextual variables affect the disclosure and transparency of pro-forma indicators
Di Lascio FML
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The paper analyses how company-specific financial factors and country-specific institutional and cultural factors affect the extent to which companies disclose Non-GAAP Financial Measures (NGFMs) in their financial communications. Our study is based on the analysis of 1,731 quarterly financial reports from 120 companies located in 23 countries and listed in Standard & Poor’s Global Oil Index. The results provide evidence that supports both the informative theory on NGFMs (asserting that NGFMs are disclosed to provide the investors with higher quality information) and the opportunistic theory (affirming that NGFMs are disclosed to mislead investors). On one side we see that highly indebted companies more frequently disclose NGFMs, but they are conservative in their adjustments, which is consistent with the informative theory. On the other side, low profitability is a driver of positive adjustments providing evidence of an opportunistic behaviour. The regulation on NGFMs has a positive effect on disclosure and does not increase conservatism. It increases the transparency of adjustments, but more in a formal way than substantially. Also the specific set of accounting standards adopted has a relevant effect on the disclosure of NGFMs. The cultural factors play a role partially consistent with this theory, but on average their impact is negligible. Our study was the first to analyse the use of NGFMs including companies from different continents and considering the impact of cultural variables. From a theoretical point of view, the results provide evidence that an informative and opportunistic use of NGFMs coexist and that different factors (mainly company-specific financial factors and institutional factors) lead to different practices. From a practical point of view the analysis provides interesting evidence for the evolution of regulations on NGFMs.