Non-GAAP Earnings Disclosure and IPO Pricing

We investigate the disclosure and prominence of non-GAAP (customized) earnings in IPO prospectuses, and how these disclosures affect IPO pricing. We find that issuers disclosing non-GAAP metrics exclude significant amounts of recurring and uncommon earnings items. Additionally, the disclosure and prominence of non-GAAP metrics are influenced by operating performance, industry-peer effects, venture backing, and the use of non-GAAP metrics in debt covenants. Our pricing tests indicate that, while non-GAAP IPOs exhibit lower underpricing, this effect is conditioned on how issuers arrive at the non-GAAP figure. Specifically, prospectuses containing larger recurring (or unusual) exclusions exhibit greater underpricing stemming from underwriter lowballing.