Transitory Earnings Components and the Two Faces of Non-GAAP Earnings
Published in Accounting and Finance, 2015, Vol. 55
42 Pages Posted: 26 Jul 2012 Last revised: 21 Jan 2016
Date Written: July 1, 2013
Non-GAAP earnings reporting has been linked with both informative and strategic incentives. We seek to disentangle these conflicting effects by examining the association between non-GAAP earnings disclosure and transitory items in GAAP earnings, conditional on managers’ reporting incentives. We report evidence of a statistically and economically significant asymmetric relation between disclosure propensity and transitory items in GAAP earnings conditional on both the sign and magnitude of the GAAP earnings surprise. Our findings suggest that non-GAAP earnings disclosures tend to be driven by a desire informative (strategic) reporting when GAAP earnings beat (undershoot) market expectations.
Keywords: Non-GAAP (Pro forma) earnings, Transitory items, FRS 3, Earnings thresholds
JEL Classification: M41, C25
Suggested Citation: Suggested Citation