The Relationship between Non-GAAP Earnings and Aggressive Estimates in Reported GAAP Numbers

50 Pages Posted: 2 Oct 2017 Last revised: 1 Nov 2021

See all articles by Ryan Guggenmos

Ryan Guggenmos

SC Johnson Graduate School of Management; Cornell SC Johnson College of Business

Kristina M. Rennekamp

SC Johnson Graduate School of Business; Cornell SC Johnson College of Business; Cornell University - Department of Accounting

Kathy Rupar

Georgia Institute of Technology

Sean Wang

Southern Methodist University

Date Written: October 29, 2021

Abstract

We use a multi-method approach to examine the effect of non-GAAP earnings disclosures on the aggressiveness of managers’ GAAP reporting to meet market expectations. We begin by providing archival evidence that GAAP earnings become more aggressive as regulatory attention to non-GAAP earnings measures increases. We then use an experiment to provide causal evidence regarding this association and to rule out alternative explanations for our results. Specifically, we predict and find that managers are willing to book an impairment that misses a GAAP-based benchmark when non-GAAP earnings that exclude this impairment are also reported. However, when regulatory attention to non-GAAP earnings disclosures increases, managers book smaller impairments to meet a GAAP-based benchmark. Collectively, our results suggest that non-GAAP earnings disclosure may decrease GAAP reporting aggressiveness, but that informal regulatory attention to non-GAAP earnings measures increases GAAP earnings management in our setting. This highlights a potential benefit of non-GAAP disclosure, and an unintended consequence of increased regulatory attention to non-GAAP measures.

Keywords: Non-GAAP measures, earnings management, aggressive reporting, reconciliation

JEL Classification: M41

Suggested Citation

Guggenmos, Ryan and Rennekamp, Kristina M. and Rupar, Kathy and Wang, Sean, The Relationship between Non-GAAP Earnings and Aggressive Estimates in Reported GAAP Numbers (October 29, 2021). Available at SSRN: https://ssrn.com/abstract=3045484 or http://dx.doi.org/10.2139/ssrn.3045484

Ryan Guggenmos

SC Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Kristina M. Rennekamp

SC Johnson Graduate School of Business ( email )

Ithaca, NY 14853
United States
607-255-0500 (Phone)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Cornell University - Department of Accounting ( email )

401P - Sage Hall
Cornell University
Ithaca, NY 14853
United States
607-255-0500 (Phone)

Kathy Rupar (Contact Author)

Georgia Institute of Technology ( email )

800 W Peachtree St NW
Suite 445
Atlanta, GA 30308-1149
United States
4043855713 (Phone)

Sean Wang

Southern Methodist University ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States
2147682858 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
482
Abstract Views
2,609
rank
77,263
PlumX Metrics