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Non-GAAP earnings and board independence

Author

Listed:
  • Richard Frankel

    (Washington University in St. Louis)

  • Sarah McVay

    (University of Utah)

  • Mark Soliman

    (University of Washington Business School)

Abstract

We examine the association between board independence and the characteristics of non-GAAP earnings. Our results suggest that companies with less independent boards are more likely to opportunistically exclude recurring items from non-GAAP earnings. Specifically, we find that exclusions from non-GAAP earnings have a greater association with future GAAP earnings and operating earnings when boards contain proportionally fewer independent directors. Consistent with the association between board independence and the permanence of non-GAAP exclusions reflecting opportunism rather than the economics of the firm, we find that the association declines following Regulation G and that managers appear to use exclusions to meet earnings targets prior to selling their shares more often in firms with fewer independent board members. Overall, our results suggest that board independence is positively associated with the quality of non-GAAP earnings.

Suggested Citation

  • Richard Frankel & Sarah McVay & Mark Soliman, 2011. "Non-GAAP earnings and board independence," Review of Accounting Studies, Springer, vol. 16(4), pages 719-744, December.
    • Handle: RePEc:spr:reaccs:v:16:y:2011:i:4:d:10.1007_s11142-011-9166-3
    DOI: 10.1007/s11142-011-9166-3
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    1. Theodore E. Christensen, 2012. "Discussion of “Why do pro forma and street earnings not reflect changes in GAAP? Evidence from SFAS 123R”," Review of Accounting Studies, Springer, vol. 17(3), pages 563-571, September.

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    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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