Who Makes the Non-GAAP Kool-Aid: How Do Managers and Analysts Influence Non-GAAP Reporting Policy?

• In Event: Voluntary Disclosure

Abstract

The non-GAAP earnings literature frequently examines managers’ and analysts’ incentives for reporting non-GAAP earnings. A primary challenge facing these studies, however, relates to the lack of evidence on whether non-GAAP earnings are a manager- or analyst-driven metric. Because prior studies argue that managers’ and analysts’ non-GAAP earnings are frequently equal, it is unclear which party’s incentives (managers or analysts) primarily influence the decision to report non-GAAP earnings. We compare managers’ and analysts’ non-GAAP reporting policies (i.e. whether or not they consistently report a non-GAAP EPS number) and find that when their policies overlap, analysts are more likely to have initiated the non-GAAP reporting policy than are managers. Thus, it appears that analysts’ incentives are more likely involved in “making the non-GAAP Kool-Aid” than managers. When managers and analysts non-GAAP reporting policies differ (i.e., only one party has a non-GAAP reporting policy), analysts’ preferred metric is at least as informative as managers’ preferred metric, and often it is more informative. These results are consistent with analysts’ decisions to adopt non-GAAP policies being motivated by informativeness, while other incentives influence managers’ non-GAAP policies. Overall, our study informs the literature on managers’ and analysts’ roles in establishing non-GAAP reporting policies and the incentives that influence their choice to adopt these policies.

Authors

• Jeremiah Bentley, Cornell University

• Theodore E Christensen, Brigham Young University

• Kurt H Gee, Stanford University

• Benjamin C Whipple, The University of Georgia