Do Firm-Specific and Peer Firm Information Shape Managers’ Non-GAAP Reporting Decisions?

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Abstract

This paper examines the role of earnings non-synchronicity, defined as the extent to which a firm’s earnings performance is determined by firm-specific vs. industry information, in shaping managers’ non-GAAP reporting decisions. Using a large sample of firms over the 2003-2016 period, we find that managers are more likely to disclose non-GAAP earnings when earnings non-synchronicity is high, that is, when firm-specific factors play a more important role in determining firms’ earnings. We also find that earnings non-synchronicity is positively associated with the quality and stock price informativeness of non-GAAP earnings. In additional tests, we find that non-synchronicity of expense component of earnings has a greater impact on the provision, quality, and informativeness of non-GAAP reporting than non-synchronicity of revenue component of earnings. Collectively, our evidence is consistent with managers using non-GAAP earnings as a signaling tool to mitigate information asymmetry when firm-specific (peer firm) information is more (less) important. Overall, we contribute to the literature by showing that firm-specific (peer firm) information and managers’ non-GAAP reporting are complements (substitutes).

Authors

• Ting Chen, University of Massachusetts Boston

• Junwoo Kim, University of Massachusetts-Boston

• Robert Kim, University of Massachusetts-Boston

• Sangwan Kim, University of Massachusetts-Boston