Qualitative Characteristics of Non-GAAP Disclosures and Non-GAAP Earnings Quality

63 Pages Posted: 9 Mar 2021

See all articles by Han-Chung Chen

Han-Chung Chen

National Taipei University

Yen-Jung Lee

National Taiwan University

Sheng-Yi Lo

Feng Chia University

Yong Yu

University of Texas at Austin

Date Written: March 5, 2021

Abstract

We examine how the qualitative characteristics of a non-GAAP earnings disclosure reveal the quality of the non-GAAP performance metric itself. We measure the qualitative aspects of the non-GAAP disclosure using an index of 12 hand-coded characteristics and presentation choices that provide context to non-GAAP disclosures. We find that more transparent qualitative information in non-GAAP disclosures is associated with more transitory non-GAAP exclusions and a lower likelihood that managers will aggressively exclude expenses in calculating non-GAAP earnings to meet or beat analysts’ forecasts. We also find that the association between non-GAAP exclusions and earnings announcement period returns is less negative for firms with more transparent qualitative information accompanying their non-GAAP disclosures. Overall, these results suggest that qualitative characteristics of non-GAAP disclosures convey useful information about the quality of non-GAAP earnings metrics.

Keywords: non-GAAP disclosures, qualitative characteristics, non-GAAP earnings, non-GAAP exclusions, earnings quality

JEL Classification: G14, M40, M41

Suggested Citation

Chen, Han-Chung and Lee, Yen-Jung and Lo, Sheng-Yi and Yu, Yong, Qualitative Characteristics of Non-GAAP Disclosures and Non-GAAP Earnings Quality (March 5, 2021). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3798735

Han-Chung Chen

National Taipei University

Dept. of Accountancy
Taipei, Taiwan 100
Taiwan

Yen-Jung Lee

National Taiwan University ( email )

Department of Accounting
No.1, Roosevelt Road, Sec. 4
Taipei 10617
Taiwan
33661110 (Phone)

Sheng-Yi Lo

Feng Chia University ( email )

Yong Yu (Contact Author)

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
145
Abstract Views
488
rank
255,265
PlumX Metrics