Non-GAAP earnings and executive compensation: An experiment

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.