Non-GAAP Earnings Reporting and Tax Management

Abstract This study examines the association between non-Generally Accepted Accounting Principles (non-GAAP) earning disclosure and tax management activity (i.e., tax avoidance), and managers can use the two channels to influence investors’ perceptions/attention. Using a sample of 12,607 firm-year observations (2003–2015), the authors find that firms voluntarily reporting non-GAAP earnings engage in more tax avoidance, consistent with the view that tax management and managerial opportunism are complementary activities, inducing greater agency concerns. In further analysis, the authors find that greater ownership by both CEOs and inside directors induce more tax avoidance of firms reporting non-GAAP earnings, but a higher board independence mitigates the tax avoidance behavior of firms reporting non-GAAP earnings. The authors also find that overconfident managers reporting non-GAAP earnings engage in more aggressive tax avoidance. The authors’ results are robust to additional tests using three alternative measures of tax avoidance, an alternative measure for non-GAAP earnings reporting, and the Heckman two-step procedure. The authors’ evidence highlights that firms with greater agency concerns tend to use both non-GAAP earnings disclosures and tax avoidance strategies.