When KPIs and profit drops support investor claims

As collective investor actions grow in Europe, the role of key performance indicators (KPIs) and alternative performance measures (APMs) has become pivotal in shaping market expectations and triggering claims. These non-IFRS metrics, such as adjusted earnings, margins, and cash flows, often serve as the primary language through which companies communicate their financial health to the market. However, because APMs are not defined under IFRS, they are subject to management discretion and internal methodologies. As a result, regulators have increasingly emphasized the need for transparency in their presentation, expecting issuers to reconcile APMs with IFRS figures. This to avoid misleading investors by presenting overly positive pictures of performance based primarily on management sentiment rather than a methodical, data-driven approach to future expectations [1].

Investors have become more discerning of discrepancies between initial projections and subsequent financial disclosures. A decline in KPIs or a profit warning, particularly when it contrasts sharply with previous APMs or forward-looking guidance, can prompt swift market reactions. The real issue lies not just in the fact of a profit decline, but in the sequence of disclosures: how KPIs, APMs, and narrative reporting evolved over time, and whether their presentation met European standards on transparency and the prohibition of misleading signals [2].

Sophisticated investors, particularly those managing capital across multiple European jurisdictions, often rely on KPIs and APMs to guide their investment decisions. When a company revises its expectations, either through IFRS-based financial reporting or a profit warning, the clarity of prior disclosures becomes critical to the claim. This is especially important in collective actions, where the initial burden of proof is not to resolve the case completely, but to show - initially even on a presumptive basis and/or with circumstantial evidence - that previous disclosures, whether through KPIs, APMs, or forward-looking statements, maintained or inflated the stock price until the subsequent corrective disclosure.

The initial evidence necessary to bring a collective investor action, indeed, does not need to be exhaustive.  consistent pattern of optimistic KPIs and APMs, a sudden downgrade in financial performance reflected in IFRS reporting or revised guidance, and a sharp negative price reaction following the corrective disclosure can form a sufficient factual and economic foundation. This is especially relevant in cases where the causal nexus is clear and the nature of the misleading disclosure points to possible scienter (knowledge of wrongdoing), which can be crucial in triggering investor claims [3].

For cases like Stellantis, where a distinct pattern of overly optimistic forward-looking statements and KPIs (perhaps also driven by a conflict of interest involving variable bonus payments for C-level executives) might precede a sharp profit warning or earnings miss, the legal argument can be compelling even before proving the full merits of the claim. As long as the initial disclosures can be shown to have contributed to maintaining the inflated stock price, investors may have the grounds to begin legal action.

This process becomes even more significant when earlier disclosures fail to meet the EU Transparency Directive [4], which requires issuers to meet high standards in their periodic reporting, and the Market Abuse Regulation [5], which prohibits misleading signals in the market. These regulations set out clear requirements for transparency and accuracy in the reporting of financial data, even for forward-looking statements.

Additionally, when using APMs, issuers must adhere to the ESMA guidelines [6] (ESMA/2015/1415) to ensure that the measures are not misleading and that they provide accurate and consistent information for investors. The Q&As from ESMA further clarify the expectations for companies using APMs in their communications with investors, ensuring they do not create an unjustifiably positive view of financial performance.

More on the Stellantis case here

[1] Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (IFRS Regulation).

[2] IAS 1 Presentation of Financial Statements (as endorsed in the EU), on the role of financial statements in providing information useful to investors.

[3] ESMA, Guidelines on Alternative Performance Measures (ESMA/2015/1415), applicable to issuers using APMs in regulated information and prospectuses.

[4] Directive 2004/109/EC (Transparency Directive), as amended.

[5] Regulation (EU) No 596/2014 on market abuse (Market Abuse Regulation), on periodic reporting and the prohibition of misleading signals.

[6] ESMA, Q&As on ESMA Guidelines on Alternative Performance Measures (ESMA32‑51‑370), clarifying expectations on the use of APMs in investor communication.