Non-GAAP earnings and board independence

Richard Frankel (), Sarah McVay () and Mark Soliman ()
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Richard Frankel: Washington University in St. Louis
Sarah McVay: University of Utah
Mark Soliman: University of Washington Business School

Review of Accounting Studies, 2011, vol. 16, issue 4, No 2, 719-744

Abstract: Abstract We examine the association between board independence and the characteristics of non-GAAP earnings. Our results suggest that companies with less independent boards are more likely to opportunistically exclude recurring items from non-GAAP earnings. Specifically, we find that exclusions from non-GAAP earnings have a greater association with future GAAP earnings and operating earnings when boards contain proportionally fewer independent directors. Consistent with the association between board independence and the permanence of non-GAAP exclusions reflecting opportunism rather than the economics of the firm, we find that the association declines following Regulation G and that managers appear to use exclusions to meet earnings targets prior to selling their shares more often in firms with fewer independent board members. Overall, our results suggest that board independence is positively associated with the quality of non-GAAP earnings.

Keywords: Board independence; Non-GAAP earnings; Earnings persistence (search for similar items in EconPapers)
JEL-codes: G30 M41 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-011-9166-3

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