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Scholarly Works (2 results)

  • Thesis
  • Peer Reviewed
UC Berkeley Electronic Theses and Dissertations (2018)

It is now common for firms to emphasize non-GAAP earnings metrics that exclude certain GAAP-based expenses, such as acquisition and restructuring expenses, intangible asset amortization, asset write-downs, and stock compensation expense. This study hypothesizes that managers become focused on non-GAAP earnings, causing them to underweight excluded expenses when making investment and accounting decisions. Consistent with the underweighting of acquisition-related expenses, firms with a history of reporting non-GAAP earnings over-invest relative to their peers, and engage in more acquisitions. With respect to accounting choices, excluded expenses such as write-downs and stock option expense are recorded and measured more conservatively when excluded from non-GAAP earnings. Using SFAS 141(R) and SFAS 123(R) as difference-in-differences settings, firms’ choices are found to be less sensitive to accounting standard changes when the affected expense is excluded from non-GAAP earnings. The evidence suggests that the use of non-GAAP earnings can influence real activities and accounting choices.

    Cover page: Do Non-GAAP Earnings Influence Real Activities and Accounting Choices?
    • Article
    • Peer Reviewed
    UC Berkeley Previously Published Works (2016)
    ABSTRACT We revisit evidence that conditional conservatism aggregates up from the firm level causing corporate profit estimates in the National Income and Product Accounts (NIPA) to be more sensitive to negative relative to positive aggregate return news. Our study delivers three main messages. First, annual estimates of NIPA corporate profits are designed to provide neutral estimates of income from current production regardless of whether times are good or bad. Second, we find spurious evidence of asymmetric sensitivity to aggregate return news in placebo test variables that are void of conditional conservatism, clearly indicating that an alternative explanation is in order. Third, we find that the variance of aggregate returns decreases with the level of economic activity. Although this return variance effect is unlikely to be attributed to accounting, it has the potential to generate spurious evidence of conditional conservatism at the macro level. Overall, our study highlights the importance of construct validity tests in archival studies and contributes to research in the properties of NIPA corporate profits. JEL Classifications: M41; G12; E43; E52. Data Availability: Data are available from the sources identified in the text.
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