| In this paper, I investigate whether accounting conservatism, or asymmetric timeliness of earnings, contributes to the disclosure of non-GAAP earnings. Earnings that incorporate losses in a timely manner inevitably produce transitory losses; the losses may improve incentives in a variety of contracts, but assessing stock value is complicated when earnings include both persistent and transitory components. One possible way for companies facing high contracting costs to balance contracting efficiency and equity valuation considerations is to report conservatively while providing additional information about transitory items via the disclosure of non-GAAP earnings. I hypothesize and test whether the disclosure of non-GAAP earnings is particularly prevalent in the presence of timely loss recognition and an elevated focus on equity valuation arising from equity offerings or CEO equity compensation/ownership. Results in my study show a greater propensity of sample firms to report non-GAAP earnings around the time of stock offerings in certain circumstances, but CEO stock compensation or ownership does not seem to motivate the use of non-GAAP earnings. Finally, firms with more conservative reporting are not more likely to disclose non-GAAP earnings. Findings of my study lend little support for the conjecture that non-GAAP earnings are used to inform investors of transitory earnings components from timely loss recognition. |
