Conclusions
Using a dataset of 1227 hand collected firm-year observations during the period 2006–2013, we examine the drivers of non-GAAP earnings disclosure as well as the effects of these disclosures on UK stocks' liquidity. Related literature shows mixed results on whether non-GAAP disclosure is used to inform or to mislead investors, by providing evidence that disclosures are made, respectively, for informative or opportunistic reasons. The UK environment is a unique research setting to provide further evidence on this issue since IFRS allow firms to include non-GAAP measures on the face of the income statement and the local regulator does not disallow such disclosures. Given their more prominent place in the financial statements, the incentives and effects associated with non-GAAP earnings disclosures made on the face of the financial statements may be fundamentally different from those associated with disclosures made in other venues. Our results show that better governed, less profitable firms, firms whose GAAP earnings fall short of market expectations, and firms with higher leverage are more likely to disclose non-GAAP earnings on the face of the income statement. Even though low profitability, profitability benchmarking, and high leverage are all consistent with the informative and the opportunistic incentives, the positive relation between corporate governance and non-GAAP disclosure is consistent only with the former. This conclusion is further corroborated by evidence suggesting that the disclosure of non-GAAP earnings is associated with increased stock liquidity. We conclude that firms use non-GAAP disclosures to reduce information asymmetry and better inform the market about their future earnings. These results should be useful to regulators and to accounting standard setters as they continually assess the informativeness of existing accounting measures.
