Qualitative characteristics of non-GAAP disclosures and non-GAAP earnings quality

Han-Chung Chen, Yen-Jung Lee, Sheng-Yi Lo and Yong Yu

Journal of Accounting and Economics, 2021, vol. 72, issue 1

Abstract: We examine how the qualitative characteristics of a non-GAAP earnings disclosure reveal the quality of the non-GAAP performance metric itself. We measure the qualitative aspects of the non-GAAP disclosure using an index of 12 hand-coded characteristics and presentation choices that provide context to non-GAAP disclosures. We find that more transparent qualitative information in non-GAAP disclosures is associated with more transitory non-GAAP exclusions and a lower likelihood that managers will aggressively exclude expenses in calculating non-GAAP earnings to meet or beat analysts’ forecasts. We also find that the association between non-GAAP exclusions and earnings announcement period returns is less negative for firms with more transparent qualitative information accompanying their non-GAAP disclosures. Overall, these results suggest that qualitative characteristics of non-GAAP disclosures convey useful information about the quality of non-GAAP earnings metrics.

Keywords: Non-GAAP disclosures; Qualitative characteristics; Non-GAAP earnings; Non-GAAP exclusions; Earnings quality (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:72:y:2021:i:1:s0165410121000173

DOI: 10.1016/j.jacceco.2021.101402

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