Non-GAAP Earnings and Board Independence

Review of Accounting Studies, Forthcoming

38 Pages Posted: 25 Jun 2007 Last revised: 26 Oct 2010

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Sarah E. McVay

University of Washington

Mark T. Soliman

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2010

Abstract

We examine the association between board independence and the characteristics of non-GAAP earnings. Our results suggest that companies with less independent boards are more likely to opportunistically exclude recurring items from non-GAAP earnings. Specifically, we find that exclusions from non-GAAP earnings have a greater association with future GAAP earnings and operating earnings when boards contain proportionally fewer independent directors. Consistent with the association between board independence and the permanence of non-GAAP exclusions reflecting opportunism rather than the economics of the firm, we find that the association declines following Regulation G, and that managers appear to use exclusions to meet earnings targets prior to selling their shares more often in firms with fewer independent board members. Overall, our results suggest that board independence is positively associated with the quality of non-GAAP earnings.

Keywords: Non-GAAP Earnings, Board Independence, Voluntary Disclosure, Earnings Quality

JEL Classification: M41, M43, M45, G34, G29, G38

Suggested Citation

Frankel, Richard M. and McVay, Sarah E. and Soliman, Mark T., Non-GAAP Earnings and Board Independence (April 1, 2010). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=994914 or http://dx.doi.org/10.2139/ssrn.994914

Richard M. Frankel (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Sarah E. McVay

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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