{"title":"Religion and disclosure of non-GAAP earnings","authors":"Wei Jiang, Pureum Kim, Myungsoo Son","doi":"10.1108/maj-04-2022-3524","DOIUrl":null,"url":null,"abstract":"\nPurpose\nThe purpose of this study is to examine whether non-generally accepted accounting principles (GAAP) earnings disclosed by firms headquartered in high religious areas (religious firms) are more informative. The non-GAAP disclosure is voluntary and not subject to external audits, and it is difficult to verify the accuracy ex post, which provides management with incentives to strategically use non-GAAP reporting. This study examines religiosity as a potential governance mechanism that reduces management opportunism.\n\n\nDesign/methodology/approach\nUsing a comprehensive sample from 2010 to 2018, the authors conduct univariate analyses and regression tests. Religiosity is measured by the number of religious adherents in the Metropolitan Statistical Areas of a firm’s headquarter location.\n\n\nFindings\nThis study finds that religious firms disclose non-GAAP earnings more frequently compared to non-religious firms. This study further documents that religiosity is negatively associated with aggressive non-GAAP reporting. It also finds that items excluded by religious firms in calculating non-GAAP earnings are less associated with future performance, suggesting that these excluded items are transient and, thus, of higher quality. Finally, the market returns on unexpected non-GAAP earnings (i.e. earnings response coefficients) are greater for religious firms. Overall, the results of this study show that non-GAAP reporting by religious firms is more likely to be informative rather than opportunistic.\n\n\nResearch limitations/implications\nDespite the authors’ best endeavors, this study does not fully address the issue of endogeneity, and therefore, the results of this study must be interpreted as strong association rather than causation.\n\n\nPractical implications\nReligious social norms (regional level) can complement a firm’s corporate governance and ethical codes (firm level) by attenuating undesirable, opportunistic management practices. These findings should be informative to investors who assess the quality non-GAAP disclosures. The findings of this study are also relevant to regulators [e.g. the Securities and Exchange Commission (SEC)] when they allocate limited resources. The SEC may use less resources for monitoring firms headquartered in religious areas and apply the saved resources on monitoring riskier firms.\n\n\nOriginality/value\nTo the best of the authors’ knowledge, this is the first study to show that religiosity may act as a potential monitoring mechanism that attenuates aggressive non-GAAP earnings and enhances the informativeness of non-GAAP. The findings of this study suggest that religious social norms (regional level) can complement a firm’s corporate governance and ethical codes (firm level) by restricting undesirable, opportunistic management practices.\n","PeriodicalId":47823,"journal":{"name":"Managerial Auditing Journal","volume":null,"pages":null},"PeriodicalIF":2.8000,"publicationDate":"2022-10-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Managerial Auditing Journal","FirstCategoryId":"91","ListUrlMain":"https://doi.org/10.1108/maj-04-2022-3524","RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
Purpose
The purpose of this study is to examine whether non-generally accepted accounting principles (GAAP) earnings disclosed by firms headquartered in high religious areas (religious firms) are more informative. The non-GAAP disclosure is voluntary and not subject to external audits, and it is difficult to verify the accuracy ex post, which provides management with incentives to strategically use non-GAAP reporting. This study examines religiosity as a potential governance mechanism that reduces management opportunism.
Design/methodology/approach
Using a comprehensive sample from 2010 to 2018, the authors conduct univariate analyses and regression tests. Religiosity is measured by the number of religious adherents in the Metropolitan Statistical Areas of a firm’s headquarter location.
Findings
This study finds that religious firms disclose non-GAAP earnings more frequently compared to non-religious firms. This study further documents that religiosity is negatively associated with aggressive non-GAAP reporting. It also finds that items excluded by religious firms in calculating non-GAAP earnings are less associated with future performance, suggesting that these excluded items are transient and, thus, of higher quality. Finally, the market returns on unexpected non-GAAP earnings (i.e. earnings response coefficients) are greater for religious firms. Overall, the results of this study show that non-GAAP reporting by religious firms is more likely to be informative rather than opportunistic.
Research limitations/implications
Despite the authors’ best endeavors, this study does not fully address the issue of endogeneity, and therefore, the results of this study must be interpreted as strong association rather than causation.
Practical implications
Religious social norms (regional level) can complement a firm’s corporate governance and ethical codes (firm level) by attenuating undesirable, opportunistic management practices. These findings should be informative to investors who assess the quality non-GAAP disclosures. The findings of this study are also relevant to regulators [e.g. the Securities and Exchange Commission (SEC)] when they allocate limited resources. The SEC may use less resources for monitoring firms headquartered in religious areas and apply the saved resources on monitoring riskier firms.
Originality/value
To the best of the authors’ knowledge, this is the first study to show that religiosity may act as a potential monitoring mechanism that attenuates aggressive non-GAAP earnings and enhances the informativeness of non-GAAP. The findings of this study suggest that religious social norms (regional level) can complement a firm’s corporate governance and ethical codes (firm level) by restricting undesirable, opportunistic management practices.
期刊介绍:
The key areas addressed are: ■Audit and Assurance (financial and non-financial) ■Financial and Managerial Reporting ■Governance, controls, risks and ethics ■Organizational issues including firm cultures, performance and development In addition, the evaluation of changes occurring in the auditing profession, as well as the broader fields of accounting and assurance, are also explored. Debates concerning organizational performance and professional competence are also covered.