Non-GAAP earnings and board independence |
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Authors: | Richard Frankel Sarah McVay Mark Soliman |
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Affiliation: | (1) Olin School of Business, Washington University in St. Louis, Campus Box 1133, One Brookings Drive, St. Louis, MO 63130, USA;(2) David Eccles School of Business, University of Utah, 1645 E. Center Campus Drive, Salt Lake City, UT 84112, USA;(3) University of Washington Business School, Box 353200, Seattle, WA 98195, USA |
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Abstract: | We examine the association between board independence and the characteristics of non-GAAP earnings. Our results suggest that companies with less independent boards are more likely to opportunistically exclude recurring items from non-GAAP earnings. Specifically, we find that exclusions from non-GAAP earnings have a greater association with future GAAP earnings and operating earnings when boards contain proportionally fewer independent directors. Consistent with the association between board independence and the permanence of non-GAAP exclusions reflecting opportunism rather than the economics of the firm, we find that the association declines following Regulation G and that managers appear to use exclusions to meet earnings targets prior to selling their shares more often in firms with fewer independent board members. Overall, our results suggest that board independence is positively associated with the quality of non-GAAP earnings. |
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