IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v60y2022i5p1915-1945.html
   My bibliography  Save this article

The Relationship Between Non‐GAAP Earnings and Aggressive Estimates in Reported GAAP Numbers

Author

Listed:
  • RYAN D. GUGGENMOS
  • KRISTINA RENNEKAMP
  • KATHY RUPAR
  • SEAN WANG

Abstract

This study uses a controlled experiment to examine the trade‐off between managers’ use of non‐GAAP and GAAP earnings to satisfy market expectations and how this relationship can be moderated by both formal and informal regulatory attention to non‐GAAP earnings. Our key takeaway is that allowing financial reporting discretion in an alternative disclosure channel, that is, non‐GAAP earnings, can reduce firms’ opportunistic GAAP reporting. However, statements by regulators about increased attention to non‐GAAP earnings constrain this channel, and this can result in more aggressive GAAP earnings management and reduced GAAP earnings quality. We triangulate these findings with a survey and archival analyses and find results that are consistent with this primary message. Our study provides evidence relevant to standard setters and regulators that non‐GAAP measures may serve an important role even if they can be used opportunistically.

Suggested Citation

  • Ryan D. Guggenmos & Kristina Rennekamp & Kathy Rupar & Sean Wang, 2022. "The Relationship Between Non‐GAAP Earnings and Aggressive Estimates in Reported GAAP Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 60(5), pages 1915-1945, December.
    • Handle: RePEc:bla:joares:v:60:y:2022:i:5:p:1915-1945
    DOI: 10.1111/1475-679X.12434
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1475-679X.12434
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1475-679X.12434?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Choudhary, Preeti, 2011. "Evidence on differences between recognition and disclosure: A comparison of inputs to estimate fair values of employee stock options," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 77-94, February.
    2. Doyle, Jeffrey T. & Jennings, Jared N. & Soliman, Mark T., 2013. "Do managers define non-GAAP earnings to meet or beat analyst forecasts?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 40-56.
    3. Choudhary, Preeti, 2011. "Evidence on differences between recognition and disclosure: A comparison of inputs to estimate fair values of employee stock options," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 77-94.
    4. Healy, P, 1996. "Discussion of a market-based evaluation of discretionary accrual models," Journal of Accounting Research, Wiley Blackwell, vol. 34, pages 107-115.
    5. Paul Hribar & Richard Mergenthaler & Aaron Roeschley & Spencer Young & Chris X. Zhao, 2022. "Do Managers Issue More Voluntary Disclosure When GAAP Limits Their Reporting Discretion in Financial Statements?," Journal of Accounting Research, Wiley Blackwell, vol. 60(1), pages 299-351, March.
    6. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
    7. Allee, Kristian D. & Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E., 2007. "Pro forma disclosure and investor sophistication: External validation of experimental evidence using archival data," Accounting, Organizations and Society, Elsevier, vol. 32(3), pages 201-222, April.
    8. Asher Curtis & Valerie Li & Paige H. Patrick, 2021. "The use of adjusted earnings in performance evaluation," Review of Accounting Studies, Springer, vol. 26(4), pages 1290-1322, December.
    9. Cohen, Daniel A. & Zarowin, Paul, 2010. "Accrual-based and real earnings management activities around seasoned equity offerings," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 2-19, May.
    10. Anne Beatty & Joseph Weber, 2006. "Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 257-288, May.
    11. Mark T. Bradshaw & Richard G. Sloan, 2002. "GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 41-66, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shanshan Pan & Michael Lacina & Haeyoung Shin, 2019. "Income Classification Shifting and Financial Analysts’ Forecasts," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-48, June.
    2. Sascha B. Herr & Peter Lorson & Jochen Pilhofer, 2022. "Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals," Schmalenbach Journal of Business Research, Springer, vol. 74(3), pages 389-451, September.
    3. Dan Dacian Cuzdriorean, 2013. "Most Recent Findings In Earnings Management Area: Interesting Insights From Traditionally Top 5 Leading Accounting Journals," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 1-5.
    4. Zalata, Alaa Mansour & Roberts, Clare, 2017. "Managing earnings using classification shifting: UK evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 29(C), pages 52-65.
    5. Florian Meier, 2020. "The Age of Cheap Money and Passive Investing: Are Pro Forma Earnings Value Relevant?," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 9(2), pages 1-1.
    6. Dirk E. Black & Ervin L. Black & Theodore E. Christensen & Kurt H. Gee, 2022. "Comparing Non-GAAP EPS in Earnings Announcements and Proxy Statements," Management Science, INFORMS, vol. 68(2), pages 1353-1377, February.
    7. Alaa Mansour Zalata & Collins Ntim & Ahmed Aboud & Ernest Gyapong, 2019. "Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle," Journal of Business Ethics, Springer, vol. 160(2), pages 515-534, December.
    8. Bradshaw, Mark T. & Christensen, Theodore E. & Gee, Kurt H. & Whipple, Benjamin C., 2018. "Analysts’ GAAP earnings forecasts and their implications for accounting research," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 46-66.
    9. Laurion, Henry, 2020. "Implications of Non-GAAP earnings for real activities and accounting choices," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    10. Zachary Kaplan & Xiumin Martin & Yifang Xie, 2021. "Truncating Optimism," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1827-1884, December.
    11. Theodore E. Christensen & Enrique Gomez & Matthew Ma & Jing Pan, 2021. "Analysts’ role in shaping non-GAAP reporting: evidence from a natural experiment," Review of Accounting Studies, Springer, vol. 26(1), pages 172-217, March.
    12. Chen, Tai-Yuan & Zhang, Guochang & Zhou, Yi, 2018. "Enforceability of non-compete covenants, discretionary investments, and financial reporting practices: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 41-60.
    13. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    14. Visani, Franco & Di Lascio, F. Marta L. & Gardini, Silvia, 2020. "The impact of institutional and cultural factors on the use of non-GAAP financial measures. International evidence from the oil and gas industry," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    15. Griffin, Paul A. & Hong, Hyun A. & Liu, Yun & Ryou, Ji Woo, 2021. "The dark side of CEO social capital: Evidence from real earnings management and future operating performance," Journal of Corporate Finance, Elsevier, vol. 68(C).
    16. Jarva, Henry & Kallunki, Juha-Pekka & Livne, Gilad, 2019. "Earnings performance measures and CEO turnover: Street versus GAAP earnings," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 249-266.
    17. Mark Brosnan & Keith Duncan & Tim Hasso & Janice Hollindale, 2023. "Non‐GAAP earnings and executive compensation: An experiment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4375-4398, December.
    18. Vasiliki Athanasakou & Norman Strong & Martin Walker, 2009. "Earnings management or forecast guidance to meet analyst expectations?," Accounting and Business Research, Taylor & Francis Journals, vol. 39(1), pages 3-35.
    19. Chen, Han-Chung & Lee, Yen-Jung & Lo, Sheng-Yi & Yu, Yong, 2021. "Qualitative characteristics of non-GAAP disclosures and non-GAAP earnings quality," Journal of Accounting and Economics, Elsevier, vol. 72(1).
    20. Silvia Gardini & F. Marta L. Di Lascio & Franco Visani, 2017. "Opportunism in disclosing pro-forma indicators: rationale and contextual drivers," BEMPS - Bozen Economics & Management Paper Series BEMPS42, Faculty of Economics and Management at the Free University of Bozen.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:60:y:2022:i:5:p:1915-1945. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.