Abstract
AbstractThis paper investigates whether managerial ability is associated with non‐GAAP earnings quality. I find that the quality of non‐GAAP earnings is greater for high‐ability managers than low‐ability managers. I also find that investors consider non‐GAAP earnings released by high‐ability management to be informative. Additional tests show that the positive association between managerial ability and the quality of non‐GAAP earnings is stronger when return volatility or managerial stock ownership is greater. The results are robust to alternative measures of managerial ability and non‐GAAP earnings quality and to controlling for endogeneity bias. Overall, this paper provides evidence that managers of high ability use non‐GAAP reporting as a signalling tool to reduce information asymmetry.
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