Local political corruption and Firm's non-GAAP reporting |
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| Institution: | 1. School of Accounting, Zhongnan University of Economics and Law, Wuhan, China;2. Research School of Accounting, Australian National University, Canberra, Australia;3. Department of Accountancy, City University of Hong Kong, Hong Kong;1. Susquehanna University, United States of America;2. Wright State University, United States of America;3. Carlos Alvarez College of Business, University of Texas at San Antonio, United States of America;1. Carroll School of Management, Boston College, USA;2. J. M. Tull School of Accounting, Terry College of Business, University of Georgia, USA;3. Graduate School of Business, Stanford University, USA;1. School of Accounting, Jiangxi University of Finance and Economics, Nanchang, China;2. School of Economics and Management, Beijing Jiaotong University, Beijing, China;3. Business School, University of Queensland, Brisbane, QLD, Australia |
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| Abstract: | We examine whether local political corruption affects managers' discretionary disclosures of non-GAAP earnings. Using United States Department of Justice data on the number of corruption convictions of government officials, we find that firms headquartered in more corrupt districts (1) are less likely to report non-GAAP earnings, (2) have less aggressive non-GAAP earnings disclosures, and (3) experience a significant decline in the exclusion magnitudes of non-GAAP earnings. These results are more pronounced for firms with concentrated operations in their headquarter states and are robust to controlling for demographic characteristics, employing alternative corruption and non-GAAP measures, using the instrumental variable approach, and conducting a difference-in-difference analysis based on firms' relocation. Finally, we show that as local political corruption increases, managers exclude lower levels of both recurring and non-recurring items when calculating non-GAAP earnings. Overall, the results suggest that managing non-GAAP reporting is one channel through which firms could deter rent-seeking by corrupt officials. |
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