Do Managers Define Non-GAAP Earnings to Meet or Beat Analyst Forecasts?

Doyle, Jeffrey T.; Jennings, Jared N.; Soliman, Mark T.

doi:10.2139/ssrn.1933882

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Do Managers Define Non-GAAP Earnings to Meet or Beat Analyst Forecasts?

Journal of Accounting & Economics (JAE), Vol. 56, No. 1, 2013

Posted: 27 Sep 2011 Last revised: 3 Apr 2020

See all articles by Jeffrey T. Doyle

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: July 1, 2013

Abstract

We provide evidence consistent with firm managers opportunistically defining non-GAAP earnings in order to meet or beat analyst expectations. This result is robust to controlling for other tools of benchmark beating (e.g., discretionary accruals, real earnings management, and expectation management). We also find that managers tend to exclude more expenses from non-GAAP earnings when it is costlier to use accrual earnings management due to balance sheet constraints, indicating that these tools are substitutes. Lastly, we find that investors discount positive earnings surprises when accompanied by exclusions from GAAP earnings, suggesting that the market partially understands the opportunistic nature of these exclusions. Our evidence is consistent with managers opportunistically defining non-GAAP earnings in a way that analysts fail to fully anticipate, resulting in an increased likelihood of exceeding analyst forecasts.

Keywords: Non-GAAP earnings, Meet or beat analyst forecasts, Earnings definition, Earnings management tools

JEL Classification: M4

Suggested Citation: Suggested Citation

Doyle, Jeffrey T. and Jennings, Jared N. and Soliman, Mark T., Do Managers Define Non-GAAP Earnings to Meet or Beat Analyst Forecasts? (July 1, 2013). Journal of Accounting & Economics (JAE), Vol. 56, No. 1, 2013, Available at SSRN: https://ssrn.com/abstract=1933882 or http://dx.doi.org/10.2139/ssrn.1933882