The Effects of Compensation and Board Quality on Non-GAAP Disclosures in Europe

Abstract

Reported performance measures that do not follow Generally Accepted Accounting Principles (GAAP) are labeled as “non-GAAP” figures. Non-GAAP reporting is subject to intense debate. On the one hand, extant research shows that non-GAAP measures convey relevant information (e.g., Bhattacharya, Black, Christensen, & Larson, 2003; Brown & Sivakumar, 2003). On the other hand, firms may opportunistically use non-GAAP figures for impressionmanagement (e.g., BlackC Bowen, Davis, M Doyle, Lundholm, & Soliman, 2003). The study of Isidro and Marques (2013–this issue) investigates whether specific corporate mechanisms (i.e., compensation contracts and corporate governance) are associated with opportunistic non-GAAP reporting. To the extent that non-GAAP information has an impact on share prices (Bhattacharya, Black, Christensen, & Mergenthaler, 2007), managers with share-based compensation have incentives to report opportunistic non-GAAP measures. However, strong corporate governance mechanisms may mitigate opportunistic reporting behavior (Beekes & Brown, 2006; Frankel, McVay, & Soliman, 2011). Consistent with this theory, Isidro and Marques (2013–this issue) find that share-based compensation of directors is positively associated with the following opportunistic non-GAAP reporting practices: probability of non-GAAP disclosure, number of adjustments for recurring items, probability of non-GAAP figures in the title of the press release, and avoidance of reconciliation. In addition, Isidro and Marques (2013–this issue) find that effective corporate governance structure—as measured by a score for board quality—is negatively correlated with the probability of non-GAAP disclosure and the emphasis given to them.