Accounting Reporting Complexity and Non-GAAP Earnings Disclosure

Abstract

We examine whether the complexity of mandatory accounting disclosures prompts managers to voluntarily disclose adjusted measures of actual earnings performance. We also explore whether this practice reflects attempts to obfuscate or mitigate the informational opacity that accounting complexity creates for investors. Using the metadata in XBRL filings, we construct measures of accounting complexity that map directly to the mandated standards applied in firms’ financial statement filings. We find a positive and economically significant association between accounting complexity and managers’ propensity to disclose non-GAAP earnings information. This relation is robust and incremental to common measures of business complexity, the language complexity of the financial report, and the transitory nature of firms’ economic activities. We also find that the quality and informativeness of adjusted earnings information increases with accounting complexity, consistent with motives to better inform investors when accounting disclosures are complex. Overall, our results suggest that managers use non-GAAP earnings disclosure as a near-term response to accounting reporting complexity.

Keywords: accounting complexity, non-GAAP earnings, XBRL, GAAP, voluntary disclosure

JEL Classification: M41, M43