The Impact of Corporate Governance on the Disclosure of Manager-Adjusted Non-GAAP Earnings

Abstract

This paper investigates the association between corporate governance and the disclosure of non-GAAP earnings measures in quarterly earnings announcements. The results reveal that the previously documented decrease in the probability of disclosure of non-GAAP earnings after Regulation G is lower in firms with (1) a higher level of institutional ownership and (2) more independent members on the board of directors. These results suggest that firms with stronger corporate governance mechanisms are less likely to make misleading earnings adjustments and, as a result, they have lower incentives to cease reporting manager-adjusted earnings numbers in the presence of SEC scrutiny. Interestingly, the presence of strong corporate governance mechanisms appears to decrease investors' reliance on adjusted earnings measures. An analysis of the market's reaction to earnings announcements indicates that both a high proportion of institutional ownership and a high percentage of outside directors are associated with a lower market reaction to non-GAAP earnings.