Non-GAAP Earnings and Board Independence
Richard M. Frankel
Washington University in Saint Louis - Olin Business School
Sarah E. McVay
University of Washington
Mark T. Soliman
University of Southern California - Marshall School of Business; Centre for International Finance and Regulation (CIFR)
October 22, 2010
Review of Accounting Studies, Forthcoming
We examine the association between board independence and the characteristics of non-GAAP earnings. Our results suggest that companies with less independent boards are more likely to opportunistically exclude recurring items from non-GAAP earnings. Specifically, we find that exclusions from non-GAAP earnings have a greater association with future GAAP earnings and operating earnings when boards contain proportionally fewer independent directors. Consistent with the association between board independence and the permanence of non-GAAP exclusions reflecting opportunism rather than the economics of the firm, we find that the association declines following Regulation G, and that managers appear to use exclusions to meet earnings targets prior to selling their shares more often in firms with fewer independent board members. Overall, our results suggest that board independence is positively associated with the quality of non-GAAP earnings.
Keywords: Non-GAAP Earnings, Board Independence, Voluntary Disclosure, Earnings Quality
JEL Classification: M41, M43, M45, G34, G29, G38Accepted Paper Series
Date posted: November 7, 2010
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