Essays on the influence of accounting regulation on non-GAAP reporting

© 2020 Hrishikesh DesaiThe regulatory landscape for non-GAAP reporting has been evolving due to changes in the U.S. SEC’s interpretations of regulations affecting non-GAAP disclosures. My dissertation, which is structured around the following essays, focusses on the influence of these changes in the regulatory landscape on specific aspects of non-GAAP disclosures. In the first essay, I examine how a 2010 change in the regulatory landscape for non-GAAP reporting affects the use of non-GAAP measures used for executive compensation contracting. In the second essay, I examine how a 2016 change in the regulatory landscape affects how managers make non-GAAP exclusion decisions. The results from this research provide evidence to regulators of the intended and unintended consequences of their rulemaking. Essay 1: I examine whether the regulation of non-GAAP disclosures constrains efficient compensation contracting. I use the regulatory shock of the January 2010 update by the U.S. SEC to its interpretive guidance on non-GAAP disclosures, which some believe relaxed the bar for non-GAAP reporting. Using a difference-in-differences estimation approach, I find that firms with strong incentives to use non-GAAP measures in CEO incentive plans started using more of these measures after the guidance update to those that did not. I also find that this increase was more pronounced among firms with a higher propensity to fail a non-GAAP regulatory test in fiscal years 2010-11, which was relaxed after the update. Based on the history of regulations affecting the use of non GAAP performance metrics and their specific applicability to non-GAAP measures used for contracting and valuation, I conclude that these effects are largely an unintended consequence of SEC rulemaking. Essay 2: I examine how managers make non-GAAP exclusion decisions depending on the type of regulatory guidance provided and their disclosure motivations. I use the U.S. SEC’s May 2016 interpretive guidance update, in which it provided specific examples of types of non-GAAP disclosures that could be misleading, to vary the level of detail in the guidance. Results of a 2 x 2 between-subjects experiment on 132 managers having an accounting/finance background provide strong evidence that managers choose to exclude an ambiguous charge in constructing a non-GAAP measure when provided with a more detailed type of guidance relative to a broader one since it lowers their decision uncertainty. I also find some evidence that managers choose to exclude the ambiguous charge when given an informativeness goal by top management as compared to an opportunism goal since the informativeness goal triggers their epistemic motivation. One of my key results is that these inferences hold only at low levels of process accountability. Finally, I also find that managers with a goal of informativeness make more ‘normative’ exclusion decisions when given a more detailed guidance as opposed to a broader one. I do not find similar or contrary evidence for managers with a goal of opportunism