Disclosure of alternative performance measures among european firms: the role of leverage, loss and opportunism

Purpose This study aims to examine the role of leverage in explaining variations in disclosure of alternative performance measures (APMs) in annual reports. It explores how leverage may simultaneously be associated with the disclosure of different types of APMs across profitable and loss-making firms. In addition, it explores the conditions under which managers are more likely to opportunistically disclose APMs to mislead investors. Design/methodology/approach Using a panel dataset of annual reports for publicly listed companies in the STOXX Europe 600 Index over an eight-year period, resulting in 3,683 firm-year observations, the study uses computer-aided text analysis to develop a measure that distinguishes between debt covenant-related and efficiency-related APMs. Findings The results suggest that debt covenant-related APMs are positively associated with leverage, whereas efficiency-related APMs are negatively associated. This indicates that leverage may influence different types of APM disclosures in opposite ways, potentially explaining mixed evidence in previous studies. In addition, the study finds that among highly leveraged firms, loss-making firms are more likely to disclose debt covenant-related APMs for opportunistic reasons than profitable firms. Originality/value The paper contributes to the literature on the role of leverage in explaining variations in APM disclosures of firms in two ways. First, current research on leverage as a determinant of corporate APM disclosure primarily examines the associations between leverage and the disclosure of APMs, but it does not provide evidence on how leverage may simultaneously be associated with the disclosure of different types of APMs. Second, this study contributes by examining the consequences of APM disclosure to distinguish managerial motivations – whether disclosures are intended to inform or mislead – which may help standard setters and regulators mitigate the risks associated with the voluntary disclosure of APMs.