Transitory Earnings Components and the Two Faces of Non‐Generally Accepted Accounting Principles Earnings

29 Pages Posted: 11 Mar 2015

See all articles by Younghoon Choi

Younghoon Choi

Sungkyunkwan University

Steven Young

Lancaster University - Department of Accounting and Finance

Date Written: March 2015

Abstract

Non‐generally accepted accounting principles (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 for informative (strategic) reporting when GAAP earnings beat (undershoot) market expectations.

Keywords: Earnings thresholds, Financial Reporting Standard No. 3, Non‐GAAP (pro forma) earnings, Transitory items

Suggested Citation

Choi, Younghoon and Young, Steven, Transitory Earnings Components and the Two Faces of Non‐Generally Accepted Accounting Principles Earnings (March 2015). Accounting & Finance, Vol. 55, Issue 1, pp. 75-103, 2015, Available at SSRN: https://ssrn.com/abstract=2576447 or http://dx.doi.org/10.1111/acfi.12040

Younghoon Choi (Contact Author)

Sungkyunkwan University ( email )

Institute for Social Sciences Myungryun-dong-3-ga, Chonogro-gu
Seoul, 110-745
Korea

Steven Young

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+441 5245-94242 (Phone)
+441 5248-47321 (Fax)

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