CPA-AGRC Distinguished Speaker Series and TRSS - Andrew Bauer

In conjunction with the Telfer Research Seminar Series

***M.Sc. Students, this event can count towards one of the six mandatory Research Seminars Series needed to attend (MHS6991 or MGT6991).***

Andrew Bauer, PhD

Earnings management and non-GAAP exclusions are two tools that firms use to achieve performance targets, which prior literature argues are substitutes. We provide evidence that firms choose whether to issue non-GAAP performance metrics based on the costs and benefits of these voluntary disclosures. In making this decision, earnings management costs are minor factors. We divide firms into two types based on this decision: “GAAP-only” (firms disclosing no non-GAAP metrics) and “non-GAAP” (firms disclosing non-GAAP metrics). Using data collected from earnings announcements for U.S. firms from 2002-2015, we find that non-GAAP firms demonstrate significantly less GAAP earnings management than GAAP-only firms using either accruals or real activities. We interpret our evidence to suggest that non-GAAP firms rationally prioritize using lower cost non-GAAP exclusions to manage performance relative to GAAP-only firms that do not have this performance management tool available. We then argue and find evidence that GAAP-only firms prioritize meeting GAAP earnings targets while non-GAAP firms prioritize meeting non-GAAP earnings targets. Our paper provides evidence that voluntary disclosure costs and benefits limit the choice set of some firms for earnings management activities, which helps to explain managers’ actions under performance management pressures.