Non-GAAP disclosure: new insights from regulators, executives and firms

<p dir="ltr">This thesis consists of three empirical studies about the voluntary disclosure of non-GAAP earnings in accounting. The first study, "Mind the GAAP: The Evolution of Regulatory Changes in Aggressive Non-GAAP Earnings", takes a dynamic perspective to examine how the regulatory changes influence firms' aggressive non-GAAP earnings disclosure. The results find that the first 2003 regulation is effective to reduce reporting larger non-GAAP earnings than GAAP earnings and improve the overall information environment. However, the revised SEC guidance of 2010 and 2016 have limited effect on restricting this non-GAAP reporting. My findings suggest that these new rules start to allow firms to adjust items at their own discretion, which provides opportunities for them to strategically disclose non-GAAP earnings. Moreoer, the SEC has not strongly enforced firms and individuals that violate the non-GAAP related regulations, which makes it advantageous for firms to follow the trend of disclosing aggressive non-GAAP earnings. Overall, this study contributes to the literatures on non-GAAP earnings, regulatory enforcement and earnings announcement by providing opposite insights on the limited effect of SEC's regulatory changes on firms' non-GAAP earnings disclosure. These findings provide implications for the regulators to balance flexibility in the non-standard financial reporting with stronger enforcement in the evolving market landscape.</p><p><br></p><p dir="ltr">The second study, "The Impact of Executive Pay Duration on non-GAAP Earnings Disclosure", examines whether executives with shorter pay duration tend to disclose larger non-GAAP earnings than GAAP earnings. Consistent with the managerial short-termism model, I find that executives with shorter pay duration tend to disclose larger non-GAAP earnings than GAAP earnings. My findings suggest that they have short term incentives to maximize their personal compensation and desire to meet or beat near-term analysts' forecasts. Moreover, this study further shows that this relation is stronger when executives are CEOs, exclude more special items, have more short-term-oriented investors, and operate in firms with weaker corporate governance or shorter projects. Finally, to address the endogeneity concern, the difference-in-difference test by adopting the implementation of FAS123-R as the exogenous shock supports my baseline results. Overall, this study contributes to the literatures on non-GAAP earnings, executive pay duration and managerial short-termism by documenting the executive incentives for short-term gains by disclosing larger non-GAAP earnings. It provides implications for regulators and firms to balance short-term benefits with long-term firm development when designing the executive pay duration on the compensation contract based on non-GAAP numbers.</p><p dir="ltr">The third study, "Does Conservative Non-GAAP Earnings Disclosure Improve Firms' Industry Standing?", focuses on conservative non-GAAP earnings disclosure to examine whether disclosing lower or equal non-GAAP earnings compared to GAAP earnings is positively associated with the firms' industry standing. Based on the voluntary disclosure and signaling theories, the results find that firms which disclose lower or equal non-GAAP earnings compared to GAAP earnings are more likely to have higher performance rankings relative to industry peers. This confirms the firms' benefits of being conservative in non-standard financial reporting. Moreover, the mechanism tests show that high-ability managers who have skills to effectively balance the benefits and costs of adopting conservative disclosure, or reputation building CEOs, who have stronger incentives to signal honesty and transparency, tend to step back in the non-GAAP numbers to maintain long-term relationship with stakeholders. This effect is stronger when firms have longer horizon. Finally, the consequence tests show that although firms might experience a weak current operating income or cash flow, their honesty and transparency are rewarded with positive investor reactions and meeting analysts' expectations. Overall, this study contributes to the literatures on non-GAAP earnings, earnings conservatism and voluntary disclosure by highlighting the beneficial role of maintaining conservatism in non-standard and unaudited non-GAAP performance reporting. It provides implications for firms to be conservative in non-GAAP earnings, and for regulators to set a more structured framework for monitoring non-GAAP earnings disclosure based on the two categories (i.e., aggressive or conservative non-GAAP earnings).</p>