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Conditional conservatism in GAAP earnings and the implications for the disclosure of non-GAAP earnings

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  • Ater, Brandon D.
  • Kilic, Emre
  • Sobngwi, Christian K.

Abstract

We examine whether and how the degree of conditional conservatism in GAAP earnings influences managers' decisions to disclose non-GAAP earnings. Conditional conservatism imposes a downward bias and may negatively affect the information content of GAAP earnings. However, prior research documents that non-GAAP earnings exhibit higher persistence, predictive ability, and information content than GAAP earnings. Consequently, we argue that companies may disclose non-GAAP earnings to circumvent the constraints imposed by conditional conservatism. Our evidence is consistent with the existence of a positive association between the degree of conditional conservatism in GAAP earnings and the decision by firms to disclose non-GAAP earnings. We also document a positive association between the extent of conditional conservatism in GAAP earnings and both the magnitude of non-GAAP exclusions and frequency of non-GAAP disclosures.

Suggested Citation

  • Ater, Brandon D. & Kilic, Emre & Sobngwi, Christian K., 2024. "Conditional conservatism in GAAP earnings and the implications for the disclosure of non-GAAP earnings," Advances in accounting, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:advacc:v:66:y:2024:i:c:s0882611023000457
    DOI: 10.1016/j.adiac.2023.100686
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    More about this item

    Keywords

    Non-GAAP earnings; Conditional conservatism; Special items;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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