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Do women mind the non-GAAP? Board gender diversity and non-GAAP disclosure quality
Abstract
We express gratitude to Andres Lozano and Lily Polic for their extensive efforts in hand-collecting the data used in this study. We also thank the participants at the 2018 Financial Markets and Corporate Governance Conference, the 2018 European Accounting Conference, and to the seminar participants at the University of Mannheim, for their helpful comments. We have benefited from the constructive feedback provided by the two anonymous reviewers and the associate editor Beatriz García Osma. Special thanks go to Paul Mather and Ted Christensen for their feedback, and to Dirk Black who kindly guided us in the calculation of the consistency and comparability measures. Luisa Unda acknowledges financial support from an Early Career Research Grant from the Monash Business School at Monash University. Sue Wright acknowledges financial support from the UTS Business School at University of Technology Sydney.
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Over the past two decades, the regulatory landscape for non-GAAP reporting has evolved significantly. Despite a temporary decline in the frequency of non-GAAP reporting following Regulation G, the incidence of non-GAAP disclosure has continued to increase steadily, leading to a current all-time high in reporting activity. This proliferation of non-GAAP disclosure has captured the attention of standard setters and regulators in recent years. This paper provides an academic perspective on policy implications for both regulation and standard setting. We contend that current Compliance and Disclosure Interpretations (C&DIs) of the SEC staff may perhaps have gone too far in restricting certain types of non-GAAP disclosures. As a result, we advocate a slight relaxation of the current enforcement of Regulation G. We agree with FASB proposals for greater disaggregation in the income statement to allow for more transparency in non-GAAP reporting. Finally, we believe the PCAOB should consider requiring auditors to take a more direct role with respect to non-GAAP disclosures.
This study examines the impact of board gender diversity on financial misconduct. The findings suggest firms with gender-diverse boards commit fewer financial reporting mistakes and engage in less fraud. The findings hold after accounting for the potentially endogenous nature of board demographic characteristics via instrumental variable approach. Furthermore, the findings are consistent in pre- and post-regulation (Sarbanes–Oxley) periods and hold for firms with good and bad governance. The findings do not seem driven by differences in effort or quality, in terms of independence and expertise, of female and male directors. The benefit derived from increasing the number of female directors on corporate boards seems to diminish at higher levels of gender diversity, indicating that impact of gender diversity on decreasing the likelihood of financial misconduct may be a result of a change to board group dynamics.
The number of firms reporting earnings on a non-GAAP basis has increased dramatically over the last decade, and non-GAAP reporting is now commonplace in capital markets. This proliferation of non-GAAP reporting has renewed both regulators’ and standard setters’ interests in these alternative performance metrics. For example, the SEC, FASB, and IASB have all recently questioned what this increasing reporting trend means for IFRS- and US-GAAP-based reporting and whether these measures are misleading to investors. This increasing focus on non-GAAP metrics motivates us to synthesize the nearly two decades of research on non-GAAP reporting to provide insights on what academics have learned to date about this reporting practice. Then, we utilize a novel dataset of detailed non-GAAP disclosures to provide new descriptive evidence on current trends in non-GAAP reporting and its recent proliferation. Finally, we discuss important questions for future researchers to consider in moving the literature forward.
In recent years, the composition of boards and, particularly, the inclusion of women on boards has attracted significant scholarly interest and public debate. In this article, I comprehensively review the academic literature on board gender composition. Using the systematic review method, I ask whether women directors really are different from men on boards, what factors shape board gender composition, how board gender composition affects organizational outcomes, and finally, why board gender quotas and other forms of regulation are introduced and what outcomes can be expected. Based on my findings, I develop a conceptual framework that clarifies the causal processes underlying both women's access to boards and the effects of women's presence on boards. Finally, I offer a research agenda designed to enrich our understanding of board gender composition.
Recent research in accounting suggests female directors exert more stringent monitoring over the financial reporting process than their male counterparts. However, an emerging literature in finance and economics provides mixed findings and questions whether females in leadership roles significantly differ from their male counterparts. Building on this literature, we re-examine the link between the presence of female directors, gender biases, and financial statements quality. Using a large sample of UK firms we find that a larger percentage of women among independent directors is significantly associated with lower earnings management practices. However, we show that this relation disappears if we focus on firms that do not discriminate against women in the access to directorships. Finally, we provide evidence that gender biases are associated with lower earnings quality. We interpret our results as consistent with (1) prior evidence that males and females do not differ substantially when performing the same role in highly specialized positions, and with (2) discrimination being an important factor explaining the association between female directors and accounting quality.
The frequency of non-GAAP (or “pro forma”) reporting has continued to increase in the United States over the last decade, despite preliminary evidence that regulatory intervention led to a decline in non-GAAP disclosures. In particular, the Sarbanes–Oxley Act of 2002 (SOX) and Regulation G (2003) impose strict requirements related to the reporting of non-GAAP numbers. More recently, the Securities and Exchange Commission (SEC) has renewed its emphasis on non-GAAP reporting and declared it a “fraud risk factor.” Given the SEC’s renewed emphasis on non-GAAP disclosures, we explore the extent to which regulation has curbed potentially misleading disclosures by investigating two measures of aggressive non-GAAP reporting. Consistent with the intent of Congress and the SEC, we find some evidence that managers report adjusted earnings metrics more cautiously in the post-SOX regulatory environment. Specifically, the results suggest that firms reporting non-GAAP earnings in the post-SOX period are less likely to (a) exclude recurring items incremental to those excluded by analysts and (b) use non-GAAP exclusions to meet strategic earnings targets on a non-GAAP basis that they miss based on Institutional Brokers’ Estimate System (I/B/E/S) actual earnings. However, we also find that some firms exclude specific recurring items aggressively. Overall, the results suggest that while regulation has generally reduced aggressive non-GAAP reporting, some firms continue to disclose non-GAAP earnings numbers that could be misleading in the post-SOX regulatory environment.
We investigate the relationship between gender diversity and risk from the perspective of equity holders. To identify the causal effect of gender on risk, we use a dynamic model which allows for the possibilities that risk can influence the gender of appointed directors and that both director gender and risk can be influenced by other unobserved firm-level factors. Our results do not support the view that female boardroom representation influences equity risk. We also show that findings of a negative relationship between the two variables are spurious and driven by unobserved between-firm heterogeneous factors.
This paper examines the relationship between board of directors' effectiveness and voluntary climate change disclosures. Since risk management and reporting fall under the board's responsibility, we relate board effectiveness to the firm's decision to voluntarily respond to the Carbon Disclosure Project (CDP) annual questionnaire as well as the quality of disclosures about climate-change-related risks and strategies to mitigate them. Our results show a positive association between board effectiveness and the firm's decision to answer the CDP questionnaire as well as its carbon disclosure quality. The paper contributes to the ongoing debate on the determinants of voluntary climate change disclosures. Our findings highlight the importance of the board of directors' role in enhancing the transparency and relevance of voluntary disclosures of climate change business impacts. Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment
A multimethod field study of 92 workgroups explored the influence of three types of workgroup diversity (social category diversity, value diversity, and informational diversity) and two moderators (task type and task interdependence) on workgroup outcomes. Informational diversity positively influenced group performance, mediated by task conflict. Value and social category diversity, task complexity, and task interdependence all moderated this effect. Social category diversity positively influenced group member morale. Value diversity decreased satisfaction, intent to remain, and commitment to the group; relationship conflict mediated the effects of value diversity. We discuss the implications of these results for group leaders, managers, and organizations wishing to create and manage a diverse workforce successfully.
The relationship between the social composition of top management teams and innovation adoptions was examined in a sample of 199 banks. The following characteristics of top management teams were examined: average age, average tenure in the firm, education level, and heterogeneity with respect to age, tenure, educational background, and functional background. In addition, the effects of bank size, location (state of operation), and team size were assessed. Results indicate that more innovative banks are managed by more educated teams who are diverse with respect to their functional areas of expertise. These relationships remain significant when organizational size, team size, and location are controlled for.
In today’s world, the corporate image of the largest companies is closely linked to their performance in the field of corporate
social responsibility and the disclosure of information on that topic, specifically, on climate change. Since the Board of
Directors is the body responsible for this process, the aim of this article is to show the role that companies’ Boards of
Directors play in the accountability process vis-à-vis stakeholders in relation to one specific aspect which has enormous significance in environmental information: practices used
to monitor greenhouse gas emissions. In order to achieve this, we shall verify certain business characteristics, in addition
to the size and activity of the Board of Directors, and we shall take different dependence models into consideration. These
models will include variables related to the level of independence and diversity of the Board of Directors, which interact
with dummy variables representing the company’s litigation risks regarding environmental behavior and the institutional macro-context
of the organization’s country of origin. The results make it clear that Boards of Directors are basically focused on the
traditional responsibility of creating economic value, instead of dealing with today’s broader business world concepts, which
include social responsibility. This focus, therefore, does not favor the accountability process before other stakeholders,
if this makes it more difficult to protect the interests of shareholders.
Keywordscorporate social responsibility-Boards of Directors-disclosure-economic theories-socio-political theories-institutional macro-context
Prior research has shown that pro-forma (recurring operating) earnings reported by managers and analysts are more value relevant than GAAP net income. Since GAAP net income contains many non-operating items that reduce its value relevance compared to operating earnings, comparing the value relevance of GAAP net income with operating earnings unduly favors operating earnings. We show that operating earnings reported by managers and analysts are more value relevant than a measure of operating earnings derived from firms' financial statements, as reported by Standard and Poor's. Our evidence is important because it indicates that operating earnings reported by managers and analysts contain value relevant information beyond that provided by operating earnings obtained by sophisticated users from firms' financial statements.
This paper examines the effect of two Securities and Exchange Commission regulatory interventions related to disclosure of non-GAAP financial measures. There are three main results. First, the probability of disclosure of non-GAAP earnings declines in 2003, but the probability of disclosure of other non-GAAP financial measures has an accelerated decline after the first intervention. Second, all else equal, after Regulation G, investors have a positive market reaction to the disclosure of non-GAAP earnings. Finally, investors react to the adjustments made by I/B/E/S financial analysts as they do to the GAAP surprise, but they do not react to the additional adjustments made by firms.
We examine the impact of board gender diversity on the sentiment in earnings press releases. Managers may use press releases to manage readers’ perceptions of corporate performance and we posit that gender diverse boards actively monitor managerial disclosures and tend to favour more cautious language in the press releases. Using a sample from ASX top 200 company voluntary disclosures and natural language text extraction processes, we find that board gender diversity is associated with the use of more cautious sentiments and less positive sentiments in earnings press releases. Further robustness tests validate our findings. We provide insights to practitioners and regulators by contributing to an ongoing regulatory debate on board gender diversity.
We use a novel data set to examine the across‐time consistency and across‐firm comparability of firms’ non‐GAAP earnings disclosures. Given widespread concern about non‐GAAP reporting among regulators, standard setters, the investor community, and academics, our investigation provides timely evidence on how managers’ deviations from their own non‐GAAP disclosure history, or the reporting of industry peers, affects how well earnings inform on firm performance. We begin by identifying firms that change their non‐GAAP earnings definition from one year to the next. These deviations are uncommon, but when managers change the items they exclude in calculating non‐GAAP earnings, the changes generally enhance the information in earnings about firms’ core performance. We also examine whether non‐GAAP earnings are more comparable than GAAP earnings and find that firms’ non‐GAAP adjustments result in greater earnings comparability. Finally, we examine instances in which firms deviate from common sector‐wide definitions of non‐GAAP earnings. We find that these deviations also result in earnings metrics that better represent firms’ core operations. Overall, our results suggest that when managers vary their non‐GAAP calculations, either across time or across firms, the resulting non‐GAAP metrics generally enhance the information in earnings about firms’ ongoing performance. Thus, our analysis helps mitigate concerns about why managers might vary their non‐GAAP reporting calculations.
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The SEC prohibits the presentation of non‐GAAP measures before corresponding GAAP measures; however, a large proportion of non‐GAAP reporters present non‐GAAP EPS before GAAP EPS in their earnings announcements. This noncompliance raises questions about whether firms use prominence to highlight higher‐ or lower‐quality non‐GAAP information. For firms reporting non‐GAAP EPS between 2003 and 2016, prominent non‐GAAP EPS is associated with higher‐quality non‐GAAP reporting. Further tests reveal that nonregulatory incentives, rather than regulatory costs, explain this relation. Specifically, prominence is associated with higher‐quality non‐GAAP reporting in settings where prominence is not regulated, investors ignore prominence when non‐GAAP reporting quality is lower, and the minority of firms using prominence to mislead exhibit characteristics associated with weaker investor monitoring. Overall, we provide evidence that regulatory noncompliance can reflect an intent to inform, and that most firms use prominence to highlight higher‐quality non‐GAAP information despite prohibitive regulation.
This article is protected by copyright. All rights reserved
We examine the association between CEO cash and equity compensation and non-GAAP disclosure practices in a responsive regulatory and opaque compensation reporting environment. Our empirical evidence, based on a sample of public companies in New Zealand, shows that CEO cash compensation is associated with the likelihood and frequency of non-GAAP disclosures, whereas equity incentives are not. Our results document evidence of an increase in the frequency of non-GAAP disclosures and a decrease in the provision and quality of reconciliation between non-GAAP measures and closely related GAAP measures around CEO cash compensation. In particular, managers use these disclosures when their GAAP earnings benchmarks are missed. A marginal decrease in opportunistic non-GAAP disclosures following the adoption of the International Financial Reporting Standards (IFRS) indicates little change in reporting behavior following adoption of IFRS. Our findings suggest that managers disclose non-GAAP measures with opportunistic intentions motivated by compensation and points to the need for regulators to set policy about clear reconciliation standards.
We investigate the influence of female chief financial officers (CFOs) on accounting fraud. Using a sample of Chinese listed firms for the period from 2003 to 2015, we find firms with female CFOs are significantly less likely to engage in accounting fraud. Further we find the negative relationship between female CFOs and accounting fraud is less significant in state-owned enterprises (SOEs), where political concerns are more pronounced. Additional tests show that the negative relationship is significant in firms with gender-mixed boards rather than male-only boards. In addition, the relationship is more pronounced when the firm has a less powerful CEO and when the CFO simultaneously holds a directorship in the same firm. Our analysis addresses both the selection and treatment concerns.
Using a sample of 394 French firms for the period of 2001 to 2010, we study the relationship between female directorship and firms’ accounting (ROA and ROE) and market-based (Tobin's Q) performance. We find that female directorship significantly increases ROA and ROE, and significantly decreases Tobin's Q. We postulate that these relationships are affected by the attributes of female directors. To this end, we collect a set of nine different attributes of female directors capturing their monitoring capabilities and contribution to the board's human capital (demographic and board relational attributes). We find that the positive relationship between accounting performance and female directorship remains when we include these attributes, while the negative relationship between Tobin's Q and female directorship disappears. Interestingly, the different attributes of female directors do not uniformly affect accounting and market-based performance. We explain the different relationships between attributes and firm performance by the tradeoff between the benefits and costs of diversity on board effectiveness, particularly in a low investor protection environment.
Purpose
The purpose of this paper is to synthesize insights from existing research on the disclosure of non-generally accepted accounting principles (GAAP) earnings, from an international point of view, and to suggest several avenues for future research in this area.
Design/methodology/approach
In conjunction with the analysis of existing research, the paper examines how different regulators and accounting standard setters have approached the topic of non-GAAP earnings disclosure.
Findings
The paper shows how non-GAAP earnings have been found to be more informative than GAAP earnings in several scenarios (countries where non-GAAP disclosures are compulsory, countries where these disclosures are voluntary but regulated and countries where they are not regulated). However, in certain circumstances, these disclosures may also mislead investors. Corporate governance mechanisms can curb managers’ opportunistic use of these measures.
Originality/value
The paper provides the growing number of academic researchers in this emerging area with a foundation and agenda upon which they can build their research.
We investigate whether gender-diverse boards contribute to capital market efficiency through their role in corporate disclosure. Using Australia’s continuous disclosure regime, we provide evidence that female directors on the board improve the frequency and volume of all types of continuous disclosure. Further analyses show that the relationship between gender-diversity and continuous disclosure is non-linear. Moreover, it requires more than one female director to have any significant effect on continuous disclosure, which is consistent with the critical mass theory. The study uses lagged independent variables and the Two-Stage-Least Squares (2SLS) approach to minimise endogeneity concerns. The results are robust to alternative variable definitions. Moreover, the Generalised Methods of Moments (GMM) and difference-in-difference techniques are used.
We formulate theory and set forth a first-ever empirical analysis of the impact of board of director gender diversity on the broad spectrum of securities fraud, generating three main insights. First, the examined data show strong evidence consistent with the view that the importance of women on boards in mitigating securities fraud lies in the mechanism of diversity itself, such that the optimal percentage of women on boards is 50% with respect to minimizing securities fraud. We find less direct support for the alternative proposition that women are more ethically sensitive and less likely to risk committing fraud, such that the optimal percentage of women on boards would be 100% with respect to mitigating securities fraud. Second, we show that the market response to fraud from a more gender-diverse board is significantly less pronounced. Third, we show that women are more effective in mitigating both the presence and severity of fraud in male-dominated industries, which again supports the notion of diversity. All our findings are robust to controls for endogeneity and propensity score matching, among other robustness checks.
We study the market's reaction to the disclosure of non-GAAP earnings measures that are combined with high impression management. We construct an impression management score that captures several communication techniques that managers often use to positively bias investors' perceptions of firm performance. We hand-collect and code both quantitative and qualitative information from earnings announcement press releases of large European firms. Our results indicate that non-GAAP measures are informative to capital markets. However, non-GAAP adjustments are more persistent when accompanied by higher levels of impression management. This evidence is consistent with managers attempting to distort users' perceptions when non-GAAP adjustments are of lower quality. Market reaction tests suggest that investors are able to see through managers' intentions and discount non-GAAP information that is accompanied by high impression management. Moreover, investors in more sophisticated markets penalize non-GAAP measures communicated with high impression management. Our results are robust to a battery of sensitivity tests, including the use of a machine-coded tone measure.
This article examines the relation between gender diversity and earnings quality for Australian firms from 2005 to 2013. We draw on the work of Kanter, highlighting the importance of the proportion of women on the board when measuring diversity. We show that all-male and skewed boards have lower earnings quality while that of tilted and balanced boards is higher. In addition, a critical mass of women is achieved when some 30% of directors are females. Performance and risk do not influence the relation. We contribute by presenting evidence supporting critical mass theory. Furthermore, our work adds to the recent debate on whether the association between gender diversity and earnings quality is U-shaped, rather than linear. Our results have implications for regulation and practice. We identify the need for a critical mass of women, rather than tokens, to enhance earnings quality.
We show that gender diversity in corporate boards could improve firm value because of the contributions that women make to the board. Prior studies examine valuation effects of gender-diverse boards and reach mixed conclusions. To help resolve this conundrum, we consider how gender diversity could affect firm value, that is, what mechanisms could explain how female directors benefit corporate board performance. We hypothesize and provide evidence that women directors contribute to boards by offering specific functional expertise, often missing from corporate boards. The additional expertise increases board heterogeneity which Kim and Starks (2015) show can increase firm value.
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of 'ownership' and 'control.' Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
We investigate IFRS non-GAAP earnings adjustments for fair value remeasurements made by companies and analysts and the usefulness of these disclosures for analysts. Examining Australian listed (ASX 200) companies during 2008–2010 (576 firm-years), we find that companies disclosing non-GAAP earnings are more likely to have a higher incidence and magnitude of profit or loss items reflecting asset remeasurements and impairment in their financial statements. We find non-GAAP disclosing companies are more likely to have analyst adjustments to earnings for these items and lower forecast error and dispersion in the following year, suggesting usefulness rather than opportunism in the adjustments.
Non-generally accepted accounting principles (GAAP) (pro forma) earnings form an increasingly important part of firms’ performance reporting narrative. This paper reviews the academic and professional debate surrounding non-GAAP earnings reporting by management. I argue that the demand for customised performance reporting is a natural response to constraints imposed by a one-size-fits-all reporting system and that the non-GAAP phenomenon forms part of a long-standing debate over the definition and presentation of periodic performance. A review of extant research suggests non-GAAP disclosures are driven by informative reporting and opportunistic motives. Opaque presentation of non-GAAP earnings is associated with earnings mispricing, particularly among unsophisticated investor groups. Regulations and governance systems designed to ensure transparency are associated with higher quality disclosures and less mispricing. While customised reporting behaviour is evident in many settings, I argue that such disclosures create particular risks in a financial reporting context because they threaten the integrity of the underlying reporting system. Prevailing regulatory approaches are reviewed and factors limiting disclosure transparency are highlighted. The paper concludes with suggestions for further research.
The disclosure of non-GAAP earnings in Australian annual reports has risen steadily in recent years. These non-statutory earnings measures are generally disclosed in the unaudited section of the annual report and are not consistent with statutory profit as defined under generally accepted Australian accounting standards (GAAP). Recent research conducted in the United States (US) has provided evidence that non-sophisticated investor decisions are influenced by the presence and prominence of non-GAAP earnings information. Further evidence suggests that investor perception changed after non-GAAP earnings disclosures became subject to regulation in that jurisdiction. Australia has high investor participation rates by international standards, including investors operating self-managed superannuation funds, resulting in a significant number of active individual investors. This study employs an experimental design to investigate the impact on non-sophisticated investors of the reporting of non-GAAP earnings information in addition to GAAP earnings information in Australian annual reports. The results of this study show a positive association between the prominent disclosure of non-GAAP earnings information and non-sophisticated investor reliance on this information. These results provide important evidence to Australian regulators as these narrative disclosures are not subject to regulation, in contrast to the US where mandatory regulation has been in place since 2003.
Using a sample of companies from the top 500 listed firms in Australia, we investigate whether the presence of a designated nomination committee and female representation on the nomination committee affect board gender diversity. We also examine whether gender diversity on the board affects firm risk and financial performance. We find that board gender diversity is significantly and positively associated with the presence of a designated nomination committee and that female representation on the nomination committee is a significant explanatory factor of increasing board gender diversity following the release of the 2010 Australian Securities Exchange Corporate Governance Council (ASXCGC) recommendations. Further, our results support the business case for board gender diversity as we find greater gender diversity moderates excessive firm risk which in turn improves firms' financial performance. Our results are robust after correcting for selection bias and controlling for other board, firm and industry characteristics.
This paper examines the effect of board gender diversity on firm performance in China's listed firms from 1999 to 2011. We document a positive and significant relation between board gender diversity and firm performance. Female executive directors have a stronger positive effect on firm performance than female independent directors, indicating that the executive effect outweighs the monitoring effect. Moreover, boards with three or more female directors have a stronger impact on firm performance than boards with two or fewer female directors, consistent with the critical mass theory. Finally, we find that the impact of female directors on firm performance is significant in legal person-controlled firms but insignificant in state-controlled firms. This paper sheds new light on China's boardroom dynamics. As governments increasingly contemplate board gender diversity policies, our study offers useful empirical guidance to Chinese regulators on the issue.
This study reports international evidence on the impact of compensation and board quality on the voluntary disclosure of non-GAAP earnings numbers. We find that compensation contracts of board directors that are linked to firm's market performance are associated with a higher probability of disclosure of non-GAAP figures in the earnings announcements' press release. Furthermore, when this type of compensation is used, firms tend to report non-GAAP figures in the title of the press release, make more adjustments for recurring items, and avoid reporting reconciliations. These reporting practices have been associated with opportunistic disclosure. We also show that an efficient governance structure of the board of directors can help restrain most of these discretionary disclosure decisions regarding non-GAAP reporting.
The inconsistent findings of past board diversity research demand a test of competing linear and curvilinear diversity–performance predictions. This research focuses on board age and gender diversity, and presents a positive linear prediction based on resource dependence theory, a negative linear prediction based on social identity theory, and an inverted U-shaped curvilinear prediction based on the integration of resource dependence theory with social identity theory. The predictions were tested using archival data on 288 large organizations listed on the Australian Securities Exchange, with a 1-year time lag between diversity (age and gender) and performance (employee productivity and return on assets). The results indicate a positive linear relationship between gender diversity and employee productivity, a negative linear relationship between age diversity and return on assets, and an inverted U-shaped curvilinear relationship between age diversity and return on assets. The findings provide additional evidence on the business case for board gender diversity and refine the business case for board age diversity.
SYNOPSIS: A primary objective of the Sarbanes-Oxley Act is to bolster public confi- dence in the U.S. capital markets. The SEC aims to achieve this objective in part by regulating the use of alternate earnings measures (colloquially referred to as ''pro forma'' earnings) that differ from generally accepted accounting principles. This paper examines whether firms change their reporting practice in response to pro forma reg- ulation. Specifically, it examines whether the use, calculation, and presentation of pro forma measures by S&P 500 companies changes between 2001 and 2003. We doc- ument three significant shifts in pro forma reporting in this period. First, the proportion of firms reporting pro forma earnings declines from 77 to 54 percent. Second, by 2003, pro forma is used in a less biased manner. Not only is the proportion of firms using pro forma earnings to increase reported income smaller than in 2001, but also the magnitudes of these increases are reduced. Third, in 2003, firms present pro formas in press releases in a much less prominent and less potentially misleading manner. These results suggest a strong impact of the recent regulation of pro forma reporting and provide important empirical evidence for policy makers.
Proportions, that is, relative numbers of socially and culturally different people in a group, are seen as critical in shaping interaction dinamics, and four group types are identified in the basis of varying proportional compositions. "Skewed" groups contain a large preponderance of one type (the numerical "dominants") over another (the rare "tokens"). A framework is developed for conceptualizing the processes that occur between dominants and tokens. Three perceptual phenomena are associated with tokens: visibility (tokens capture a disproportionate awareness share), polarization (differences between tokens and dominants are exaggerated), and assimilation (tokens' attributes are distorted to fit preexisting generalizations about their social type). Visibility generates performance pressures; polarization leads dominants to heighten their group boundaries; and assimilation leads to the tokens' role entrapment. Illustrations are drawn from a field study in a large industrial corporation. Concepts are exten...
A spate of legislated quotas for female representation on corporate boards in European firms and significant voluntary increases in the number and proportion of female directors in U. S. firms indicate that board gender diversity has increasingly been recognized as a matter of importance worldwide. Although the proponents of gender diversity have argued that it results in greater transparency and makes corporate earnings more credible, there is little supporting empirical evidence. We fill this void by examining the relation between female board participation and the quality of reported earnings. Using a sample of U.S. listed firms from 2001 to 2007, we show a positive relation between the presence of female directors (female nonexecutive directors, female audit committee members) and earnings quality, measured by accruals quality and earnings benchmark measures (the frequency of earnings increases and the frequency of meeting or beating consensus analyst earnings estimates). The results continue to be significant after controlling for endogeneity, firm-level board governance, and other known firm and industry characteristics. Our findings are not driven by tokenism (having one female director to create a perception of inclusion) and are robust to alternative variable definitions. These findings provide much needed support for the increased attention paid to gender diversity on corporate boards.
Attention is increasingly focused on the potential individual career and firm-level benefits of international experience for upper level executives. This research examines the relationships between CEO international experience, CEO tenure, firm internationalization, succession events, and corporate financial performance. Results indicate a significant interactive effect between CEO tenure and outside succession on CEO international experience. In addition to a relationship with CEO international experience, there are two additional interactive effects in the examination of corporate financial performance: (1) CEO international experience and the degree of firm internationalization, and (2) CEO international experience and CEO succession. These interactive effects are evident in accounting and market indicators of corporate financial performance. Copyright © 2000 John Wiley & Sons, Ltd.
In recent years, many companies have emphasized adjusted-GAAP earnings numbers in their quarterly press releases. While managers use different names to describe these non-standard earnings metrics, the financial press frequently refers to them as "pro forma" earnings. Managers and other advocates of pro forma reporting argue that these disclosures provide a clearer picture of companies' core earnings. On the other hand, regulators, policymakers, and the financial press often allege that managers' pro forma earnings disclosures are opportunistic attempts to mislead investors. Recent evidence suggests that while many pro forma earnings disclosures are altruistically motivated, some may represent managers' attempts to portray overly-optimistic financial performance. If this is the case, less-wealthy, less-sophisticated, individual investors are arguably the most at risk of being misled. Consequently, this study investigates who trades on pro forma earnings information. Our intraday investigation of transactions around earnings announcements containing pro forma earnings information reveals that less-sophisticated investors' announcement-period abnormal trading is significantly positively associated with the magnitude and direction of the earnings surprise based on pro forma earnings. In contrast, we find no association between sophisticated investors' trading and manager-reported pro forma information. Overall, our analyses and numerous robustness tests suggest that the segment of the market that relies on pro forma earnings information is populated predominantly by less-sophisticated individual investors. This evidence is particularly relevant to standard setters and regulators given that Section 401(b) of the Sarbanes-Oxley Act of 2002 and subsequent SEC regulations are specifically designed to protect ordinary investors from misleading pro forma information.
Whereas the majority of research on board diversity explores the direct relationship between racial and gender diversity and firm performance, this paper investigates mediators that explain how board diversity is related to firm performance. Grounded in signalling theory and the behavioural theory of the firm, we suggest that this relationship operates through two mediators: firm reputation and innovation. In a sample of Fortune 500 firms, we find a positive relationship between board racial diversity and both firm reputation and innovation. We find that reputation and innovation both partially mediate the relationship between board racial diversity and firm performance. In addition, we find a positive relationship between board gender diversity and innovation.
This paper provides evidence on the characteristics of firms that include pro forma earnings information in their press releases, whether the usefulness of pro forma earnings to investors varies systematically with these characteristics, and whether the investor response to pro forma earnings is consistent with market efficiency or mispricing. Using a sample of 249 press releases from 1997-99, we find that firms with low GAAP earnings informativeness are more likely to disclose pro forma earnings than other firms. We also find that strategic considerations, measured using the direction of GAAP earnings surprises, are an important determinant of pro forma reporting. In addition, our examination of the relative and incremental information content of pro forma earnings shows that investors find pro forma earnings to be more useful when GAAP earnings informativeness is low or when strategic considerations are absent. Tests of the predictive ability of pro forma earnings for future profitability and returns are mixed, and we therefore cannot conclusively determine whether the investor reaction to pro forma earnings at the time of the press release is consistent with market efficiency or mispricing. The paper contributes to the growing literature on pro forma earnings and more generally to the literature on voluntary and strategic disclosure.
We empirically examine the effects of intensified scrutiny over non-GAAP reporting on the quality of non-GAAP earnings exclusions. We find that, on average, exclusions are of higher quality (i.e., more transitory) following intervention by the Securities and Exchange Commission (SEC) into non-GAAP reporting. We further find that firms that stopped releasing non-GAAP earnings numbers after the SEC intervention had lower quality exclusions in the pre-intervention period. These results are consistent with the SEC's objectives of improving the quality of non-GAAP earnings figures. However, when we decompose total exclusions into special items and other exclusions, we find evidence that the quality of special items has decreased in the post-intervention period, which suggests that managers adapted to the new disclosure environment by shifting more recurring expenses into special items. This suggests that there may be unintended consequences arising from the heightened scrutiny over non-GAAP reporting.
This paper examines whether industry efforts to decrease managerial discretion, increase uniformity, and improve transparency of a non-GAAP performance measure change voluntary disclosure and market perceptions. We find that the frequency of REITs meeting or beating analysts' expectations of funds from operations (FFO) decreases following explicit industry initiatives to discourage manipulation. Concurrent with this shift, we find that the information content of FFO to investors increased, particularly for firms reporting a reconciliation of FFO with GAAP earnings. We also examine firms in other industries to assess alternative explanations for these results, such as SEC intervention. Collectively, our findings suggest that industry guidance about non-GAAP performance curtailed managers' opportunistic reporting. Furthermore, the market response to FFO is consistent with investors perceiving less manipulation and greater reliability. Our evidence also supports the SEC's subsequent requirement that all non-GAAP disclosures be reconciled to the nearest GAAP measures.
This paper examines the joint effects of corporate governance and regulation by the Securities and Exchange Commission on the disclosure of manager-adjusted non-GAAP (or pro forma) earnings numbers in the United States. We provide evidence that prior to Regulation G investors were misled by disclosures of non-GAAP earnings, but only for disclosures made by firms with weaker corporate governance. After the SEC intervention there is no evidence that investors were still being misled. Furthermore, the effect of the intervention applied to both adjustments that are ex ante recurring as well as to adjustments that just meet or beat analysts’ forecasts.
We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that chief executive officer turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.
We show that stock prices of firms with gender-diverse boards reflect more firm-specific information after controlling for corporate governance, earnings quality, institutional ownership and acquisition activity. Further, we show that the relationship is stronger for firms with weak corporate governance suggesting that gender-diverse boards could act as a substitute mechanism for corporate governance that would be otherwise weak. The results are robust to alternative specifications of informativeness and gender diversity and to sensitivity tests controlling for time-invariant firm characteristics and alternative measures of stock price informativeness. We also find that gender diversity improves stock price informativeness through the mechanism of increased public disclosure in large firms and by encouraging private information collection in small firms.
This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. Our analyses of short-window abnormal returns and revisions in analysts’ one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of “core earnings” than GAAP operating income.
Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous. While IV estimation is the standard textbook solution to mitigating endogeneity problems, the appropriateness of IV methods in typical accounting research settings is not obvious. Drawing on recent advances in statistics and econometrics, we identify conditions under which IV methods are preferred to OLS estimates and propose a series of tests for research studies employing IV methods. We illustrate these ideas by examining the relation between corporate disclosure and the cost of capital.
Regulation G requires all companies to quantitatively reconcile pro forma earnings with GAAP earnings. This paper provides three findings related to the impact of reconciliations on mispricing of pro forma earnings. First, prior to Reg G, we find that mispricing of pro forma earnings is limited to firms with low reconciliation quality. There is no evidence of mispricing for firms with high reconciliation quality. Second, we find no evidence of mispricing after Reg G. Third, there is a cross-Reg G reduction of mispricing for firms whose reconciliation quality improves, and there continues to be no mispricing for firms that have high reconciliation quality both before and after Reg G. Together, our results support the notion that better reconciliations reduce the extent of mispricing.