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Rev Account Stud (2011) 16:719744
DOI 10.1007/s11142-011-9166-3
Richard Frankel Sarah McVay Mark Soliman
Published online: 17 July 2011 Springer Science+Business Media, LLC 2011
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. Specically, we nd 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 reecting opportunism rather than the economics of the rm, we nd 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 rms 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
JEL Classication M41 G30
R. Frankel
Olin School of Business, Washington University in St. Louis, Campus Box 1133, One Brookings Drive, St. Louis, MO 63130, USAe-mail: [email protected]
S. McVay (&)
David Eccles School of Business, University of Utah, 1645 E. Center Campus Drive, Salt Lake City, UT 84112, USAe-mail: [email protected]
M. Soliman
University of Washington Business School, Box 353200, Seattle, WA 98195, USA e-mail: [email protected]
Non-GAAP earnings and board independence
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1 Introduction
We study how the nature of non-GAAP earnings varies with board independence. A non-GAAP earnings number is a core earnings measure that excludes components of GAAP earnings. Managers sometimes choose to voluntarily disclose non-GAAP earnings in their press releases, determining the exclusions at their own discretion. Since non-GAAP earnings numbers disclosed in press releases are not subject to audit, opportunism can affect managers exclusion choices (Doyle et al. 2003; Bowen et al. 2005; Black and Christensen 2009), and the nature of exclusions varies substantially both across rms and across quarters of the same rm (Bhattacharya et al. 2004).1 Prior research indicates, however, that non-GAAP earnings are more persistent than GAAP earnings (Bhattacharya et al. 2003), and rms tend to disclose non-GAAP earnings when GAAP earnings are less informative (Lougee and Marquardt 2004), suggesting that...