Non-GAAP earnings and board independence

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.

Does the Monitoring Mechanisms Considered as Dilemma against the Practices of Earnings Management

“…This is done via controlling and monitoring the corporate managers' opportunistic behavior. Consequently, Frankel, McVay and Soliman (2011), independent directors on the board may significantly contribute in the monitoring of the construction of financial reports by the management.…”

Market Reaction to Non-GAAP Earnings Around SEC Regulation

“…Control variables, to control for potential correlated omitted variables, are identified based on previous studies (Kolev et al, 2008;Frankel et al, 2011;and Kyung 2014): Growth, Ln(Size), Loss, Earnings_Volatility, and Book_to_Market_Assets, each of which is anticipated to be correlated with both Non_GAAP_Earnings and Future-Operating_Earnings. 12 The analysis further includes the natural logarithm of Ln(Size) to deal with skewness in the distribution of the dependant variables.…”

“…12 The analysis further includes the natural logarithm of Ln(Size) to deal with skewness in the distribution of the dependant variables. To further control for size effects in the analysis (following Kolev et al, 2008 andFrankel et al, 2011), variables such as SUM_FutOpEarn, GAAP_Earnings, Non_GAAP_Earnings, Total_Exclusions, Special_Items, Other_Exclusions, and Growth are standardised by total assets per share. All continuous variables are further winsorized at the top and bottom two percent to avoid undue influence by outliers.…”

“…First, this study exploits two regulatory settings to investigate whether the SEC's interventions achieve their regulatory outcomes. The two regulatory settings are: the SEC's implementation of Regulation G on January 22, 2003, imposing additional disclosure and filing requirements on firms publicly disclosing non-GAAP earnings; and the SEC's issuance of new C&DIs on January 11, 2010, relaxing the restrictive guidance of Regulation G. Empirical findings tend to support the implementation of Regulation G, as it improves the quality of non-GAAP earnings exclusions and curtails firm's opportunistic behaviour (e.g., Heflin and Hsu, 2008;Kolev et al, 2008;Frankel et al, 2011). Empirical evidence on the effectiveness of the issuance of C&DIs, are, however, limited (the notable exception being Kyung, 2014).…”

Detecting Target‐Driven Earnings Management Based on the Distribution of Digits

“…Previous research in the area of earnings management has identified asymmetries in the frequency distribution of the earnings metric near specific earnings target thresholds (essentially following seminal works by Hayn, and Burgstahler and Dichev, ). The most common thresholds employed are (i) zero (e.g., Burgstahler and Dichev, ; Degeorge et al., ; Bhattacharya et al., ; Burgstahler and Eames, ; Lang et al., ; Barua et al., ; and Dierynck et al., ), (ii) previous‐period value (e.g., Burgstahler and Dichev, ; Degeorge et al., ; Beatty et al., ; Barua et al., ; and Frankel et al., ), and (iii) analysts’ consensus forecasts (e.g., Degeorge et al., ; Brown and Higgins, , ; Burgstahler and Eames, ; Koh et al., ; Barua et al., ; and Eames and Kim, ).…”