The Relationship between Non-GAAP Earnings and Aggressive Estimates in Reported GAAP Numbers
50 Pages Posted: 2 Oct 2017 Last revised: 1 Nov 2021
Date Written: October 29, 2021
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: Suggested Citation