Non-GAAP Earnings Disclosures: Users’ Perspective.

Student thesis: Doctoral Thesis


This dissertation examines how qualitative non-GAAP disclosures can affect investor decision making. It provides evidence that current accounting regulations surrounding such disclosures are useful to financial statement users and influence investor judgments. A largely recent, and archival, non-GAAP literature, which is maturing from its initial opportunistic versus informative roots, reveals a nuanced, but context-dependent, consensus slowly emerging. Increasing investor awareness of non-GAAP disclosures, coupled with tighter regulatory scrutiny of the practice, is resulting in users considering the management defined measures as more of a complement, rather than a replacement, to those prepared in accordance with accounting standards.

However, there is no suggestion the world of non-GAAP reporting is perfect. Evidence persists of firms using the management defined measures for opportunistic purposes. Whilst regulation is improving the non-GAAP disclosure environment; researchers still need to undertake constant fine-tuning and testing of the appropriate accounting standards and regulations. This dissertation contains experimental studies that examine two previously untested U.S. Security and Exchange Commission filing requirements. The two requirements are (1) how management internally uses non-GAAP earnings and (2) why management believes the disclosure of non-GAAP earnings is important. This dissertation utilises online participants to conduct two experiments concerning qualitative, non-GAAP earnings disclosures.

The first study, referred to as the Compensation study, examines the corporate disclosure of how management internally uses non-GAAP earnings. This study addresses the research question, “how does the disclosure of managements’ internal use of non-GAAP earnings affect the decision making of financial statement users?” Specifically, whether or not the use of non-GAAP earnings to determine executive compensation influences investor judgments, including investor evaluations of corporate financial performance and willingness to invest. The Compensation study finds investors prefer companies that use non-GAAP earnings in their performance contracting of executives. The finding persists in the prima facie more opportunistic setting of a reported GAAP loss and simultaneous non-GAAP profit. The additional analysis finds, contrary to prior research, contemporary investors cognitively rely on non-GAAP measures when making their investment-related decisions.

The second study, referred to as the Justification study, examines the corporate disclosure of how (and if) management justifies reporting their non-GAAP earnings. This study addresses the research question, “how does the disclosure of managements’ justification of providing non-GAAP earnings affect the decision making of financial statement users?” Specifically, whether a highly ambiguous or highly detailed non-GAAP earnings justification influences investor judgments. The study also examines the scenario where management is silent on non-GAAP disclosure. The Justification study finds investors’ judgments are not influenced by either the level of detail management provides or the presence of a non-GAAP earnings justification. However, preliminary evidence suggests investors’ reactions to non-GAAP justifications are moderated by investors’ level of financial reporting knowledge.

These findings are important for regulators seeking to maximise the reporting efficiency of corporate disclosure requirements and to standard-setting bodies, FASB and IASB, as they seek to craft accounting standards that produce reliable and relevant information for their intended audience. This dissertation provides input into what the IASB terms ‘the disclosure problem’. The concerns are financial statements do not contain enough relevant information, contain too much irrelevant information, and ineffectively communicate the information they do provide. This dissertation contributes to the debate by highlighting management’s internal use of non-GAAP measures as being relevant information and management’s justification of non-GAAP measures as being, predominately, irrelevant for investor decision making.

The experimental studies also contribute to the extensive extant literature surrounding agency theory, attribution theory and ambiguity theory. It answers the call of behavioural accounting researchers to investigate judgment and decision-making theories in a financial accounting context.
Date of Award2 Dec 2022
Original languageEnglish
SupervisorKeith Duncan (Supervisor), Jan Hollindale (Supervisor) & Tim Hasso (Supervisor)

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