AAA Spark Meeting of Regions

Non-GAAP Earnings Reporting and Classification Shifting

• In Event: Non-GAAP Earnings Reporting and Earnings Management

Abstract

In this study, we examine the association between non-GAAP earnings disclosure and classification shifting, two tools managers can employ to influence investors’ perceptions of firms’ core performance. A full sample analysis shows that non-GAAP earnings reporting is associated with less classification shifting (i.e., higher quality of special items) and better future performance, which suggests that non-GAAP earnings disclosures could be used for informative purposes. Further analyses show that for firms that have high levels of CEO entrenchment and firms that report non-GAAP earnings with transitory losses, non-GAAP earnings reporting is associated with more classification shifting. This indicates that firms can report non-GAAP earnings and manipulate GAAP earnings by misclassifying core expenses as special items to disguise the negative aspects of firm performance when the incentive to portray a good core earnings picture is strong. We also find that firms that have just started reporting non-GAAP figures are more likely to misclassify core expenses as special items.

Authors

• SangHyun Suh, University of Massachusetts-Lowell

• Huiqi Gan, University of Massachusetts-Lowell