The real effect of non-gaap disclosures and financial reporting consistency : an examination of managers’ investment choices

• Main Author: Helikum, Lukas J.
• Other Authors: Tan Hun Tong
• Format: Theses and Dissertations
• Language: English
• Published: 2018
• Subjects: DRNTU::Business::Accounting::Disclosure; DRNTU::Business::Accounting::Reporting; DRNTU::Business::Accounting::Financial statements and analysis; DRNTU::Business::Finance::Asset allocation
• Online Access: http://hdl.handle.net/10356/74595
• Institution: Nanyang Technological University

Firms increasingly report earnings measures that do not comply with Generally Accepted Accounting Principles (GAAP) in their financial disclosures. While prior work has examined the informativeness of these measures for investors and potential opportunistic behavior by firms, the objective of this study is to examine how a firm’s disclosure of non-GAAP earnings affects managers’ real economic decisions. I report the results of two experiments in which the presence and consistency of non-GAAP disclosures are independently manipulated. The results show that non-GAAP disclosures can lead managers discount costs that are subsequently excluded from the non-GAAP measure which can lead to suboptimal investment decisions. I also find that this effect is present only when managers focus on financial reporting implications and when the non-GAAP earnings figure is consistently defined over time which is important as auditors and regulators actively enforce consistent reporting. Jointly, the findings suggest that managers make a conscious decision to maximize reported non-GAAP performance when the firm has a policy of disclosing adjusted earnings measures even at the expense of the economic performance of the firm. These insights contribute to the accounting literature on non-GAAP reporting and the real effects of financial reporting. They also have important practical implications for firms as well as investors and can inform the ongoing debates by regulators and standard setters.