Non‐GAAP earnings and executive compensation: An experiment

This is the authors' abstract. We don't add key points for this paper.

Literature suggests investors react to the presence, presentation and prominence of non‐GAAP earnings disclosures. We extend this literature by considering the purpose of non‐GAAP earnings disclosures and their effect on investors' judgements and decisions. We find when non‐GAAP earnings are used to determine executive compensation, investors assign a higher evaluation of financial performance and invest more capital. Consistent with attribution theory, our mediation model finds that using non‐GAAP earnings to remunerate executives strengthens the informative perception of non‐GAAP earnings disclosures, influencing their evaluation and investment decision. Contrary to prior literature, we find investors intentionally rely on non‐GAAP earnings in decision‐making.