Do women mind the non-GAAP? Board gender diversity and non-GAAP disclosure quality

Abstract

We examine whether board gender diversity promotes high-quality non-GAAP disclosures. Specifically, we use two recently-developed measures that capture key characteristics of financial reporting quality, namely consistency and comparability in non-GAAP reporting. We find that gender-diverse boards are more effective at ensuring both consistency and comparability of non-GAAP earnings disclosures. Our results will help investors to understand the information communicated by non-GAAP reporting. They also will guide standard-setters and regulators as they determine standards and guidelines that lead to better outcomes for investors.

Keywords:

• Non-GAAP earnings
• Board gender diversity
• Consistency
• Comparability

JEL codes:

• G34
• M41

Disclosure statement

No potential conflict of interest was reported by the author(s).

Acknowledgements

We express gratitude to Andres Lozano and Lily Polic for their extensive efforts in handcollecting the data used in this study. We also thank the participants at the 2018 Financial Markets and Corporate Governance Conference, the 2018 European Accounting Conference, and to the seminar participants at the University of Mannheim, for their helpful comments. We have benefited from the constructive feedback provided by the two anonymous reviewers and the associate editor Beatriz García Osma. Special thanks go to Paul Mather and Ted Christensen for their feedback, and to Dirk Black who kindly guided us in the calculation of the consistency and comparability measures. Luisa Unda acknowledges financial support from an Early Career Research Grant from the Monash Business School at Monash University. Sue Wright acknowledges financial support from the UTS Business School at University of Technology Sydney.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 ‘Non-GAAP’ earnings is the general term most often used when referring to a manager-provided number. ‘Street’ earnings refers to an analyst-provided non-GAAP number (i.e., the consensus analyst non-GAAP performance metric).

2 Consistency and comparability are related terms. According to the IFRS conceptual framework, comparability is an enhancing qualitative characteristic that allows users to compare the financial results of a firm over time or with other firms (IASB, 2018, p. 2.24–2.29, p. A29). Comparability is the goal; consistency helps to achieve that goal. Similarly, the conceptual framework identifies comparability as an enhancing qualitative characteristic of GAAP-based reporting, and consistency as an important determinant of overall comparability (FASB, 2010, SFAC No. 8, p.19). We define consistency and comparability to capture how firms treat individual exclusion items across time or across firms. We use the term consistency to refer to across-time comparisons of non-GAAP calculations for the same firm, and we use the term comparability to refer to across-firm comparisons of non-GAAP calculations at a point in time.

3 We note that because Australian firms follow IFRS rules, and the ASIC refers to management-adjusted performance metrics as non-IFRS, the technically correct term in Australia is ‘non-IFRS’. However, the academic literature uses the term ‘non-GAAP’, so we choose this term to better connect our study with prior research.

4 International Financial Reporting Standards, issued by the International Accounting Standards Board (IASB).

5 Australia’s RG230 (2011) issued by Australian Securities and Investment Commission (ASIC) and ESMA (2015) issued by European Securities and Markets Authority both refer to consistency and comparability in non-GAAP reporting.

6 EFRAG provides the European Commission with technical advice on accounting matters.

7 ASIC is the Australian security market regulator.

8 One reason for high participation by individual investors in Australia is self-managed superannuation funds (Johnson et al., 2014).

9 Note that although the recommendations in the ASX Corporate Governance Guidelines include forming an audit committee, they are based on an if not why not approach, which means a listed entity can decide not to have an audit committee, as long as the reasons for this decision are disclosed.

10 Garcia-Lara et al. (2017) suggest that prior evidence on board gender diversity may be attributable to gender bias by mainly male directors in granting access to board seats, rather than the influence of the female directors themselves. Taking this perspective, board gender diversity might be a consequence of the underlying corporate governance rather than an influence for better corporate governance.

11 We acknowledge that there can be variations in non-GAAP earnings calculations across time and across firms. For example, exclusions may relate to one-time items and therefore only some years or some firms may have something to exclude. Moreover, firms may have items that managers could exclude, but different managers might make different choices about excluding them. In this scenario, the board relies on the manager’s ability to decide the items that need to be excluded to reflect persistent future core operating performance.

12 This consistency design identifies managers’ treatment of items that occur in successive years and classifies the treatment of these items depending on whether managers similarly included or excluded these items in years t and t-1. This requirement mitigates the effect of non-recurring adjustments on the consistency measure. For example, the consistency measure is not affected by instances where a firm excludes a non-recurring item in year t, but does not experience (and thus, include or exclude) the same non-recurring event in year t-1.

13 In Australia, ASX firms are classified into 11 sectors following the GICS (Global Industry Classification Standards). The sector remains fixed throughout the sample period.

14 These are untabulated results. Black et al. (2021) reports slightly lower consistency in firms’ exclusions across years for their sample of S&P firms. They find that firms exclude amortization-, restructuring- and acquisition-related items in successive years, 86%, 79% and 72% of the time, respectively.

15 There is no set benchmark for assessing economic significance in non-GAAP reporting (Black et al., 2021). In our design, we assess economic significance by comparing the relative coefficients and the standard deviations of board gender diversity variables with the means of non-GAAP dependent variables.

16 In contrast to the regulatory view, we acknowledge recent evidence by Chen et al. (2021) revealing that prominent non-GAAP earnings per share is associated with higher quality non-GAAP reporting.

Additional information

Funding

This work was supported by UTS Business School; Monash Business School Early Career Researcher Grant.