Accounting Reporting Complexity and Non-GAAP Earnings Disclosure

58 Pages Posted: 2 Aug 2018 Last revised: 21 Oct 2020

See all articles by Nerissa C. Brown

Nerissa C. Brown

University of Illinois at Urbana-Champaign

Adrienna A. Huffman

The Brattle Group

Shira Cohen

San Diego State University

Date Written: October 20, 2020

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 disclosure practice reflects attempts to obfuscate or to mitigate informational problems arising from accounting complexity. 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 and the language complexity of the financial report. 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 an immediate response to accounting complexity.

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

JEL Classification: M41, M43

Suggested Citation

Brown, Nerissa C. and Huffman, Adrienna A. and Cohen, Shira, Accounting Reporting Complexity and Non-GAAP Earnings Disclosure (October 20, 2020). 29th Annual Conference on Financial Economics & Accounting 2018, Available at SSRN: https://ssrn.com/abstract=3224798 or http://dx.doi.org/10.2139/ssrn.3224798

Nerissa C. Brown (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Adrienna A. Huffman

The Brattle Group ( email )

San Francisco, CA 9133
United States

Shira Cohen

San Diego State University ( email )

San Diego, CA 92182-0763
United States

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