The Disclosure of Non-GAAP Earnings Information in the Presence of Transitory Gains
Curtis, Asher B., McVay, Sarah E., Whipple, Benjamin C.
The Accounting Review · 2014 · Volume 89 · Issue 3
Abstract
We examine the disclosure of non-GAAP earnings information in quarters containing transitory gains to investigate whether the primary motivation for these managers to disclose non-GAAP earnings is to inform or mislead. In this setting, non-GAAP earnings are moreinformativethan GAAP earnings, even though they arelowerthan GAAP earnings. Thus, managers motivated to inform stakeholders about sustainable earnings will disclose non-GAAP earnings information excluding the gain, whereas managers motivated to report higher earnings will obscure the transitory nature of the gain by focusing on GAAP earnings. We find evidence that managers' disclosure choices vary widely across firms, and these choices affect investors' perceptions of core operating earnings. We then contrast how thesame firmdiscloses non-GAAP earnings in the presence of transitorylossesto provide additional evidence on the motives of individual firms' disclosures. We conclude that the most pervasive motivation to disclose non-GAAP earnings in the presence of transitory gains is to inform. An economically significant proportion of firms, however, appear opportunistic in that they only disclose non-GAAP earnings information when it increases investors' perceptions of core operating earnings. Our evidence is important because we speak to the influence thateachmotive has on the choice to disclose non-GAAP earnings and we provide evidence on the underlying motives behindspecificfirms' disclosures. Data Availability:All data are available from the sources cited in the text.
Keywords
non-GAAP earnings, transitory items, transitory gains, disclosure incentives, voluntary disclosure
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