The Influence of Regulation Affecting Non-GAAP Reporting on Executive Compensation Contracting

Posted: 11 Mar 2021 Last revised: 22 Feb 2022

Date Written: March 1, 2017

Abstract

The regulatory landscape for non-GAAP reporting has been evolving due to changes in the U.S. SEC’s interpretations of regulations affecting non-GAAP disclosures. I examine whether the regulation of non-GAAP disclosures constrains efficient compensation contracting. I use the regulatory shock of the January 2010 update by the U.S. SEC to its interpretive guidance on non-GAAP disclosures, which some believe relaxed the bar for non-GAAP reporting. Using a novel hand-collected dataset on non-GAAP measures used by S&P 900 firms over the period from 2007 to 2017 and a difference-in-differences estimation approach, I find that firms with strong incentives to use non-GAAP measures in CEO incentive plans started using more of these measures after the guidance update to those that did not. I also find that this increase was more pronounced among firms with a higher propensity to fail a non-GAAP regulatory test in fiscal years 2010-11, which was relaxed after the update. Based on the history of regulations affecting the use of non-GAAP performance metrics and their specific applicability to non-GAAP measures used for contracting and valuation, I conclude that these effects are largely an unintended consequence of SEC rulemaking.

Keywords: CEO compensation, contracting, non-GAAP measures, SEC regulations

JEL Classification: G38, M40, M41, M48

Suggested Citation

Desai, Hrishikesh, The Influence of Regulation Affecting Non-GAAP Reporting on Executive Compensation Contracting (March 1, 2017). Available at SSRN: https://ssrn.com/abstract=3778917 or http://dx.doi.org/10.2139/ssrn.3778917

Hrishikesh Desai (Contact Author)

Arkansas State University ( email )

BU 306, 2007 Aggie Road
College of Business, Arkansas State University
Jonesboro, AR State University 72467-0970
United States
8706808316 (Phone)

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