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

46 Pages Posted: 2 Oct 2017 Last revised: 18 Apr 2022

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 Management; Cornell SC Johnson College of Business

Kathy Rupar

Georgia Institute of Technology

Sean Wang

Southern Methodist University (SMU) - Accounting Department

Date Written: April 12, 2022

Abstract

This study uses a controlled experiment to examine the trade-off between managers’ use of non-GAAP and GAAP earnings to satisfy market expectations, and how this relationship can be moderated by both formal and informal regulatory attention to non-GAAP earnings. Our key takeaway is that allowing financial reporting discretion in an alternative disclosure channel, i.e. non-GAAP earnings, can reduce firms’ opportunistic GAAP reporting. However, statements by regulators about increased attention to non-GAAP earnings constrains this channel, and this can result in more aggressive GAAP earnings management and reduced GAAP earnings quality. We triangulate these findings with a survey and archival analyses, and find results that are consistent with this primary message. Our study provides evidence relevant to standard setters and regulators that non-GAAP measures may serve an important role even if they can be used opportunistically.

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

JEL Classification: G32; G41; H32; K22; M40; 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 (April 12, 2022). 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 Management ( email )

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

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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 (SMU) - Accounting Department ( email )

United States
2147682858 (Phone)

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