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

Posted by ARC Commitee - Sep 20, 2022

Managers often supplement their GAAP financial reporting with additional voluntary disclosures to provide investors with more tailored and sometimes nuanced insights into their firm’s performance. These disclosures of alternative earnings figures are commonly known as ‘non-GAAP’ earnings. Given that the quality of these disclosures varies, we ask what company governance characteristic(s) might guide an investor whether to trust non-GAAP earnings or not? We focus on board gender diversity. We draw insights from prior research to argue that board gender diversity increases monitoring of non-GAAP earnings, thus increasing the quality of these disclosures.

We measure non-GAAP earnings quality by how consistently firms calculate their non-GAAP earnings across time (consistency), and how non-GAAP exclusions compare with their peer firms’ exclusions (comparability). From a standard setting perspective, the qualities of consistency and comparability are relevant and critical characteristics of financial reporting.

Using a sample of Australian listed firms from 2013 to 2018, we find that the frequency of non-GAAP disclosures is high and has increased at a steady rate across the six years. Our multivariate analysis suggests that when firms have gender-diverse boards, their non-GAAP disclosures are more consistent and more comparable. Moreover, firms with more gender-diverse boards give less prominence to non-GAAP reporting. They are less likely to disclose non-GAAP earnings before GAAP earnings. Finally, aggressive non-GAAP disclosures, that is when non-GAAP earnings per share meets or beats the consensus forecast but GAAP earnings does not, are less pronounced when there is higher board gender diversity.

Overall, our results indicate that in a lightly-regulated but developed market, a gender-diverse board can promote these key qualitative characteristics of non-GAAP reporting. Our insights about non-GAAP reporting corroborate the importance of internal control mechanisms associated with the board of directors. Our study provides insights to regulators on an important channel for improving non-GAAP disclosure quality, board gender diversity.

This paper is forthcaoming at the European Accounting Review –


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