Non-GAAP earnings and executive compensation: An experiment

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Abstract

Literature suggests investors react to the presence, presentation and prominence of non-GAAP earnings disclosures. We extend this literature by considering the purpose of non-GAAP earnings disclosures and their effect on investors' judgements and decisions. We find when non-GAAP earnings are used to determine executive compensation, investors assign a higher evaluation of financial performance and invest more capital. Consistent with attribution theory, our mediation model finds that using non-GAAP earnings to remunerate executives strengthens the informative perception of non-GAAP earnings disclosures, influencing their evaluation and investment decision. Contrary to prior literature, we find investors intentionally rely on non-GAAP earnings in decision-making.
Original languageEnglish
Pages (from-to)1-24
Number of pages24
JournalAccounting and Finance (ONLINE)
DOIs
Publication statusPublished - 27 Apr 2023

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