The Relationship between Non-GAAP Earnings and Aggressive Estimates in Reported GAAP Numbers

In this paper, we examine the possibility that disclosure of non-GAAP earnings allows managers to satisfy market expectations with respect to firm performance without resorting to GAAP earnings management, reducing the aggressiveness of managers' GAAP reporting. In an experiment using experienced participants, we predict and find that managers are willing to book a larger impairment that misses a GAAP-based benchmark when non-GAAP earnings that exclude this impairment are also reported. However, when regulatory focus on non-GAAP earnings is made salient, managers book a smaller impairment in order to meet a GAAP-based benchmark. We triangulate these results with archival and survey data. Collectively, our results suggest that disclosure of non-GAAP earnings may decrease aggressiveness of GAAP reporting. This highlights a potential unintended consequence of increased regulatory focus on non-GAAP reporting