Non-GAAP Earnings and Board Independence

Posted: 7 Nov 2010  

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 22, 2010

Abstract

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, G38

Suggested Citation

Frankel, Richard M. and McVay, Sarah E. and Soliman, Mark T., Non-GAAP Earnings and Board Independence (October 22, 2010). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1703684

Richard M. Frankel

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Sarah E. McVay (Contact Author)

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

Los Angeles, CA 90089
United States

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