Do More Able Managers Provide Better Non-Gaap Earnings?

Abstract

This paper investigates whether managerial ability is associated with non-GAAP earnings quality. I find that the quality of non-GAAP earnings is greater for high-ability managers than low-ability managers. I also find that investors consider non-GAAP earnings released by high-ability management to be informative. Additional tests show that the positive association between managerial ability and the quality of non-GAAP earnings is stronger when return volatility or managerial stock ownership is greater. The results are robust to alternative measures of managerial ability and non-GAAP earnings quality and to controlling for endogeneity bias. Overall, this paper provides evidence that managers of high ability use non-GAAP reporting as a signaling tool to reduce information asymmetry.

Keywords: Managerial ability, Managerial efficiency, Non-GAAP earnings, Voluntary disclosure, Information asymmetry

JEL Classification: G14, M12, M41, M48