Conditional conservatism in GAAP earnings and the implications for the disclosure of non-GAAP earnings

We examine whether and how the degree of conditional conservatism in GAAP earnings influences managers' decisions to disclose non-GAAP earnings. Conditional conservatism imposes a downward bias and may negatively affect the information content of GAAP earnings. However, prior research documents that non-GAAP earnings exhibit higher persistence, predictive ability, and information content than GAAP earnings. Consequently, we argue that companies may disclose non-GAAP earnings to circumvent the constraints imposed by conditional conservatism. Our evidence is consistent with the existence of a positive association between the degree of conditional conservatism in GAAP earnings and the decision by firms to disclose non-GAAP earnings. We also document a positive association between the extent of conditional conservatism in GAAP earnings and both the magnitude of non-GAAP exclusions and frequency of non-GAAP disclosures.