Strategy typology and non-GAAP earnings disclosure

This paper examines the influence of business strategy on firms’ discretionary disclosure of non-GAAP earnings. We find that innovation-oriented firms (i.e., prospectors) have a higher propensity of disclosing non-GAAP earnings, whereas efficiency-driven firms (i.e., defenders) are less likely to issue non-GAAP earnings. Subsequent tests reveal that the prospector managers are more likely to disclose non-GAAP earnings to ‘convert’ a GAAP loss into a non-GAAP profit and ‘meet and beat’ analyst forecasts, consistent with managers’ opportunistic use of non-GAAP earnings as a strategic device to engage in impression management. To corroborate the managerial opportunism behind non-GAAP earnings disclosure, we test the quality of non-GAAP exclusions and find that the managerial exclusions by prospectors are of lower quality. Cross-sectional analyses indicate that the positive relationship between business strategy and non-GAAP earnings disclosure is more pronounced amongst firms with higher levels of prior accruals management, firms facing higher agency costs, and firms with higher managerial ability. Our results are robust to a battery of robustness tests such as triple-differences analysis based on exogenous shocks, propensity-score-matching technique, and instrumental variable approach. Overall, our study documents the role of business strategy as an intrinsic and non-financial firm characteristic in shaping the voluntary disclosure of financial information.