Managers have a variety of tools at their disposal to influence stakeholder perceptions. Earnings management and the strategic reporting of non‐ GAAP earnings are just two of the available menu choices. We explore how real earnings management and accruals management influence the probability that a company will disclose a non‐ GAAP adjusted earnings metric in its earnings press release and the likelihood that it will do so aggressively. We first investigate situations where managers already meet analysts’ expectations either based on strong operating performance or after employing real and accruals management. We find that when solid operating performance alone allows firms to meet expectations, managers do not employ earnings management or non‐ GAAP reporting. However, when managers meet expectations using real and accruals management, they are significantly less likely to report a non‐ GAAP earnings metric. Next, we explore scenarios where companies fall short of expectations. We find that when they just miss expectations after managing GAAP earnings, they are significantly more likely to employ non‐ GAAP reporting, suggesting that the timing and relatively costless nature of non‐ GAAP reporting allows managers to appear to meet expectations on a non‐ GAAP basis when managed GAAP earnings fall short. Moreover, we find that companies are more likely to report non‐ GAAP earnings (and to do so aggressively) when (i) they are unable to use real or accruals earnings management, (ii) are constrained by prior‐period accruals management, and (iii) their operating performance is poor. Taken together, our results are consistent with a substitute relation between non‐ GAAP reporting and both real and accruals management.

The Securities and Exchange Commission encourages the presentation of information or data in graphical form to improve users' ability to understand financial disclosures. We find a dramatic increase in the disclosure of both qualitative and quantitative infographics in 10-K filings over time and substantial cross-sectional variation in firms' choices regarding image types, data content, and the placement of infographics within 10-Ks. We provide evidence on factors associated with firms’ use of infographics and explore the persistence with which they are disclosed over time. Finally, we investigate the relation between the use of infographics and uncertainty in capital markets.

We use newly available GAAP forecasts to document that traditionally-identified GAAP forecast errors contain 37% measurement error. Correcting for this measurement error, we settle a long-standing debate regarding investor preference for GAAP versus non-GAAP earnings and provide strong evidence of a preference for non-GAAP earnings. We also revisit the use of non-GAAP exclusions to meet analysts’ forecasts when GAAP earnings fall short. Results indicate that 34% of these traditionally-identified meet-or-beat firms are misidentified due to measurement error, and this error masks evidence that firms more frequently exclude transitory rather than recurring expenses for meet-or-beat purposes.

We use a novel data set to examine the across‐time consistency and across‐firm comparability of firms' non‐GAAP earnings disclosures. Given widespread concern about non‐GAAP reporting among regulators, standard setters, the investor community, and academics, our investigation provides timely evidence on how managers' deviations from their own non‐GAAP disclosure history, or the reporting of industry peers, affects how well earnings inform on firm performance. We begin by identifying firms that change their non‐GAAP earnings definition from one year to the next. These deviations are uncommon, but when managers change the items they exclude in calculating non‐GAAP earnings, the changes generally enhance the information in earnings about firms' core performance. We also examine whether non‐GAAP earnings are more comparable than GAAP earnings and find that firms' non‐GAAP adjustments result in greater earnings comparability. Finally, we examine instances in which firms deviate from common sector‐wide definitions of non‐GAAP earnings. We find that these deviations also result in earnings metrics that better represent firms' core operations. Overall, our results suggest that when managers vary their non‐GAAP calculations, either across time or across firms, the resulting non‐GAAP metrics generally enhance the information in earnings about firms' ongoing performance. Thus, our analysis helps mitigate concerns about why managers might vary their non‐GAAP reporting calculations.

Researchers frequently proxy for managers’ non‐GAAP disclosures using performance metrics available through analyst forecast data providers (FDPs), such as I/B/E/S. The extent to which FDP‐provided earnings are a valid proxy for managers’ non‐GAAP reporting, however, has been debated extensively. We explore this important question by creating the first large‐sample data set of managers’ non‐GAAP earnings disclosures, which we directly compare to I/B/E/S data. Although we find a substantial overlap between the two data sets, we also find that they differ in systematic ways because I/B/E/S (1) excludes managers’ lower quality non‐GAAP numbers and (2) sometimes provides higher quality non‐GAAP measures that managers do not explicitly disclose. Our results indicate that using I/B/E/S to identify managers’ non‐GAAP disclosures significantly underestimates the aggressiveness of their reporting choices. We encourage researchers interested in managers’ non‐GAAP reporting to use our newly available data set of manager‐disclosed non‐GAAP metrics because it more accurately captures managers’ reporting choices.

This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. Our analyses of short-window abnormal returns and revisions in analysts’ one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of “core earnings” than GAAP operating income.

Researchers typically infer real earnings management when a firm's operating and investing activities differ from industry norms. A significant problem with classifying deviations from industry averages as myopic earnings management is that companies can change their operating and investing decisions for strategic business reasons rather than to mislead stakeholders. Using principal components analysis, we systematically evaluate existing measures and develop a comprehensive real activities measure to better capture earnings manipulation. Our measure reflects (i) deviations from industry averages across multiple activities and (ii) other signals of manipulation. This approach is promising because, although there are many sources of abnormal activities, manipulation is more likely the cause when managers engage in multiple income‐increasing abnormal activities that coincide with other signals that indicate an elevated risk of manipulation. This simple approach results in a metric that associates negatively with future operating performance and earnings persistence, yields high‐power tests, and captures manipulation reasonably well across most life‐cycle stages. Importantly, this approach performs better than the standard real earnings management metrics across all dimensions. Specifically, it generates the expected reduction in future earnings and reduced earnings persistence in 82% of the tests compared to 36% and 46% in common alternatives. Also, because this innovation does not require a long time‐series or rely on future period realizations for classification, it can be useful in more research settings than other recent innovations in the literature.

We examine the influence of investor sentiment on managers’ discretionary disclosure of “pro forma” (adjusted) earnings metrics in earnings press releases. We find that managers’ propensity to disclose an adjusted earnings metric (especially one that exceeds the GAAP earnings number) increases with the level of investor sentiment. Furthermore, our analyses suggest that, as investor sentiment increases, managers: (1) exclude higher levels of both recurring and nonrecurring expenses in calculating the pro forma earnings number and (2) emphasize the pro forma figure by placing it more prominently within the earnings press release. Additional analyses indicate that the association between investor sentiment and managers’ pro forma disclosure decisions at least partly reflects opportunistic motives. Finally, we find that managers’ own sentiment‐driven expectations also play a role in their pro forma disclosure decisions.