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  • Jennifer M Mueller-Phillips
    The Disclosure of Non-GAAP Earnings Information in the...
    research summary posted July 16, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure, 09.07 GAAP Departures, 14.0 Corporate Matters, 14.05 Earnings Targets and Management Behavior 
    The Disclosure of Non-GAAP Earnings Information in the Presence of Transitory Gains.
    Practical Implications:

    The authors find that the informative disclosure of non-GAAP earnings information enables investors to better understand firms’ future operating performance relative to opaque disclosures. Further, the results suggest that the most pervasive motive behind the disclosure of non-GAAP earnings information is to inform, although an economically significant proportion of firms appear to be opportunistic in that they only disclose non-GAAP earnings information when it increases investors’ perceptions of core operating earnings. The study should be useful to investors, financial analysts, regulators, and researchers for assessing the non-GAAP disclosure motives of management and the effect of these motives on market participants.


    Curtis, A. B., McVay, S. E., & Whipple, B. C. 2014. The Disclosure of Non-GAAP Earnings Information in the Presence of Transitory Gains. Accounting Review 89 (3): 933-958.

    disclosure incentives, non-GAAP earnings, transitory gains, transitory items, voluntary disclosure
    Purpose of the Study:

    Managers regularly highlight the transitory components of GAAP earnings in their earnings announcements, and frequently disclose non-GAAP earnings excluding these transitory components. The motivation for managers to disclose non-GAAP earnings, however, is heavily debated. On one hand, managers claim that they disclose non-GAAP earnings to aid investors in assessing the firm’s core operating performance. On the other hand, regulators express concerns that some managers may be motivated to inflate perceptions of core operating performance, which could mislead investors. Essentially, this ongoing debate centers on whether managers disclose non-GAAP earnings to inform or mislead. Non-GAAP earnings are generally more predictive of future operating earnings, but they can also be overstated to meet strategic earnings benchmarks on a non-GAAP basis. Because most transitory items are income-decreasing, both motives predict the same disclosure choice. Because both motives impact managers’ non-GAAP disclosure, it is difficult to determine which motivation is more pervasive or to provide evidence that a particular disclosure is unambiguously informative or opportunistic.

    The authors 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.

    Design/Method/ Approach:

    The authors examine a sample of 1,920 firm-quarters with transitory gains in the form of net income-increasing special items of at least one penny per share from 2004 to 2009. They require sample firms to have (1) CRSP coverage, (2) a non-missing earnings announcement date on Compustat, (3) a non-missing 10-Q/K filing date on EDGAR, (4) at least two days between the earnings announcement and filing dates, and (5) data available for each of the variables, including one-year-ahead earnings.


    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.

    • The most pervasive motivation for non-GAAP reporting in the presence of transitory gains is to inform.
    • Nearly half of the sample discloses non-GAAP earnings information that allows investors to quickly and easily assess operating performance excluding the gain. Investors of these firms appear to efficiently price the transitory nature of these gains.
    • The remaining earnings announcements contain more opaque disclosures. Among these firms, investors price the gain positively at the time of the earnings announcement, but this partially reverses at the time of the subsequent 10-Q/K filing. The evidence is consistent with investors not fully incorporating the transitory nature of the gain at the time of the earnings announcement.
    • Among opaque disclosers, the authors find that approximately half appear to follow a consistent policy of non-disclosure across both transitory gain and transitory loss quarters. The other half, however, appear opportunistic because they disclose non-GAAP earnings information in transitory loss quarters, but not transitory gain quarters.
    • The authors also find some evidence of egregious opportunism. In 101 firm-quarters, which is 5.3 percent of the sample, managers explicitly disclose non-GAAP earnings, excluding expenses but including transitory gains; this is more prevalent when it allows them to meet earnings benchmarks.
    Auditor Judgment, Corporate Matters
    Adequacy of Disclosure, Earnings Targets & Management Behavior, GAAP Departures

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