Non-GAAP measure disclosure and insider trading incentives in high-tech IPO firms

Abstract

Purpose

This paper aims to investigate whether the non-generally accepted accounting principles (GAAP) performance measures (NGMs) disclosure by high-tech initial public offering (IPO) firms signal firms’ efforts to maintain relatively high stock price levels before the expiration of the lock-up period to benefit insider selling.

Design/methodology/approach

The authors perform ordinary least squares and logit regressions using financial statement data and hand collected data on NGM disclosures for high-tech firms during the IPO process.

Findings

The authors find that the top executives of high-tech IPO firms with NGM disclosures are significantly more likely to sell and sell significantly more insider shares at the lock-up expiration than those of high-tech IPO firms without NGM disclosures. At the same time, while high-tech NGM firms have stock returns similar to their counterparts without NGMs for the period before the lock-up expiration, their stock returns are substantially lower after insider selling following the lock-up expiration.

Practical implications

By documenting the negative association between NGM disclosures and post-lockup expiration stock performance, the study highlights managerial deliberate optimism about the firm’s prospects which may not materialize. Hence, investors should take the NGM disclosures with a grain of salt.

Originality/value

This paper fills a notable void in the non-GAAP reporting literature by documenting a statistically and economically significant positive association between managerial equity trading incentives and NGM disclosures by high-tech IPO firms.

Citation

BC, B. and Liu, B. (2022), "Non-GAAP measure disclosure and insider trading incentives in high-tech IPO firms", Accounting Research Journal, Vol. 35 No. 4, pp. 526-542. https://doi.org/10.1108/ARJ-01-2021-0016