Do Non-GAAP Earnings Influence Managers’ Real Activities and Accounting Choices?

80 Pages Posted: 21 Apr 2016 Last revised: 2 Aug 2018

Henry Laurion

University of Colorado at Boulder - Department of Accounting

Date Written: July 25, 2018

Abstract

It is now common for firms to emphasize non-GAAP earnings metrics that exclude certain GAAP-based expenses, such as acquisition and restructuring expenses, intangible asset amortization, asset write-downs, and stock compensation expense. This study hypothesizes that managers become focused on non-GAAP earnings, causing them to underweight excluded expenses when making investment and accounting decisions. Consistent with the underweighting of acquisition-related expenses, firms with a history of reporting non-GAAP earnings over-invest relative to their peers, and engage in more acquisitions. With respect to accounting choices, excluded expenses such as write-downs and stock option expense are recorded and measured more conservatively when excluded from non-GAAP earnings. Using SFAS 141(R) and SFAS 123(R) as difference-in-differences settings, firms’ real activities and accounting choices are found to be less sensitive to accounting standard changes when the affected expense is excluded from non-GAAP earnings. The evidence suggests that the use of non-GAAP earnings can influence real activities and accounting choices.

Keywords: Non-GAAP Earnings; Abnormal Investment; Acquisitions; Layoffs; Write-downs; Stock Option Expense; SFAS 141(R); SFAS 123(R)

JEL Classification: M20; M40; M41

Suggested Citation

Laurion, Henry, Do Non-GAAP Earnings Influence Managers’ Real Activities and Accounting Choices? (July 25, 2018). Available at SSRN: https://ssrn.com/abstract=2764490 or http://dx.doi.org/10.2139/ssrn.2764490

Henry Laurion (Contact Author)

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

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