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Non-GAAP Disclosures and CEO Pay Levels

David H. Lont

Department of Accountancy and Finance, University of Otago, P. O. Box 56, Dunedin 9054, New Zealand

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Dinithi Ranasinghe

Department of Accountancy and Finance, University of Otago, P. O. Box 56, Dunedin 9054, New Zealand

E-mail Address: dinithi.ranasinghe@otago.ac.nz

Corresponding author.

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, and

Helen Roberts

Department of Accountancy and Finance, University of Otago, P. O. Box 56, Dunedin 9054, New Zealand

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https://doi.org/10.1142/S109440602050016XCited by:5 (Source: Crossref)

Abstract

We examine the association between CEO cash and equity compensation and non-GAAP disclosure practices in a responsive regulatory and opaque compensation reporting environment. Our empirical evidence, based on a sample of public companies in New Zealand, shows that CEO cash compensation is associated with the likelihood and frequency of non-GAAP disclosures, whereas equity incentives are not. Our results document evidence of an increase in the frequency of non-GAAP disclosures and a decrease in the provision and quality of reconciliation between non-GAAP measures and closely related GAAP measures around CEO cash compensation. In particular, managers use these disclosures when their GAAP earnings benchmarks are missed. A marginal decrease in opportunistic non-GAAP disclosures following the adoption of the International Financial Reporting Standards (IFRS) indicates little change in reporting behavior following adoption of IFRS. Our findings suggest that managers disclose non-GAAP measures with opportunistic intentions motivated by compensation and points to the need for regulators to set policy about clear reconciliation standards.

Keywords:

JEL: G34, J33, M41

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