Transitory Earnings Components and the Two Faces of Non-GAAP Earnings

Published in Accounting and Finance, 2015, Vol. 55

42 Pages Posted: 26 Jul 2012 Last revised: 21 Jan 2016

See all articles by Young-Soo Choi

Young-Soo Choi

Sungkyunkwan University

Steven Young

Lancaster University - Department of Accounting and Finance

Date Written: July 1, 2013

Abstract

Non-GAAP earnings reporting has been linked with both informative and strategic incentives. We seek to disentangle these conflicting effects by examining the association between non-GAAP earnings disclosure and transitory items in GAAP earnings, conditional on managers’ reporting incentives. We report evidence of a statistically and economically significant asymmetric relation between disclosure propensity and transitory items in GAAP earnings conditional on both the sign and magnitude of the GAAP earnings surprise. Our findings suggest that non-GAAP earnings disclosures tend to be driven by a desire informative (strategic) reporting when GAAP earnings beat (undershoot) market expectations.

Keywords: Non-GAAP (Pro forma) earnings, Transitory items, FRS 3, Earnings thresholds

JEL Classification: M41, C25

Suggested Citation

Choi, Young-Soo and Young, Steven, Transitory Earnings Components and the Two Faces of Non-GAAP Earnings (July 1, 2013). Published in Accounting and Finance, 2015, Vol. 55, Available at SSRN: https://ssrn.com/abstract=2115466 or http://dx.doi.org/10.2139/ssrn.2115466

Young-Soo Choi (Contact Author)

Sungkyunkwan University ( email )

School of Business
53 Myeongnyun-dong 3-ga, Jongno-gu
Seoul, 110-745
Korea
+8227600423 (Phone)
+8227600440 (Fax)

Steven Young

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+441 5245-94242 (Phone)
+441 5248-47321 (Fax)

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