Earnings Management and Non-GAAP Disclosure Practices

Earnings management involves the strategic timing, classification and measurement of financial transactions by managers to present a desired picture of corporate performance. Non-GAAP disclosure has grown in parallel, as firms supplement standard measures with alternative metrics—such as EBITDA and adjusted earnings—to communicate decision-useful information. While these practices can enhance transparency by highlighting core operating trends or one-off events, they also introduce opportunities for opportunistic adjustment. Global regulators have responded with guidelines aimed at improving the comparability and reliability of non-GAAP figures, yet practitioners often navigate a complex landscape of accounting standards, investor expectations and market pressures. Understanding the mechanisms of accrual choice, classification shifting and voluntary reconciliation is essential for stakeholders seeking to assess underlying economic performance, mitigate information asymmetry and strengthen the link between reported results and real operating outcomes.

Research from Nature Portfolio

A recent examination of non-GAAP profitability measures in Gulf Cooperation Council markets reveals that earnings before interest, tax, depreciation and amortisation are positively correlated with firms’ investment intensity, while earnings before interest and tax exhibit a negative association. The analysis, covering multiple regulatory regimes and employing robust estimators to address endogeneity, indicates that foreign investors disproportionately rely on the EBITDA measure when allocating capital. These findings highlight the crucial role of non-GAAP metrics in cross-border investment decisions and suggest that policymakers and market participants should consider the information attributes of alternate earnings measures when evaluating corporate growth prospects.

Earnings Management and Non-GAAP Disclosure Practices publication trend

The graph below shows the total number of articles in earnings management and non-gaap disclosure practices across all publications each year (not limited to Nature Index journals).

Technical terms

Earnings management: The deliberate manipulation of accounting choices and financial reporting timing to influence reported performance.

Non-GAAP measures: Alternative performance metrics presented by firms that adjust or exclude items not defined by standard accounting principles.

Classification shifting: The reallocation of revenues or expenses among financial statement categories to affect profitability metrics.

Discretionary accruals: Managerially controlled adjustments to earnings arising from estimates and judgements in accrual accounting.

EBITDA: A non-GAAP measure representing earnings before interest, taxes, depreciation and amortisation, often used to gauge operational cash flow.

EBIT: Earnings before interest and tax, a standard measure of operating profitability.

Other surprises: Earnings deviations in components beyond consensus earnings-per-share forecasts that affect investor returns.

References

1. Classification shifting using income-decreasing special items: measurement and valuation issues. Review of Accounting Studies (2023).
2. Beyond the street EPS surprise – when ‘other surprises’ matter in explaining earnings announcement returns. Accounting and Business Research (2024).
3. The information content of mandatory and discretionary non-GAAP earnings. Pacific Accounting Review (2023).
4. The relationship between investment intensity and profitability measures from the perspective of foreign investors. Humanities and Social Sciences Communications (2023).