The Effect of Voluntary Clawback Adoption on Non-GAAP Reporting

In this paper, we examine the effect of voluntary adoption of clawback provision on non-GAAP earnings disclosures. The extant literature documents that the voluntary adoption of clawback provisions improves financial reporting quality by increasing the costs of misstating GAAP earnings. However, managers may respond to perception of reduced discretion over GAAP reporting by increasing their reliance on non-GAAP earnings disclosures. Using propensity score matching and a difference-in-differences research design, we document that managers disclose non-GAAP earnings more frequently after clawback adoption, but the quality of non-GAAP earnings exclusions declines. These findings are consistent with a more opportunistic use of non-GAAP reporting following clawback adoption. We confirm our findings with additional cross-sectional tests related to constraints on GAAP earnings management and managerial meeting-orbeating behavior. Our results suggest that managers adapt to the more restrictive reporting environment created through clawback adoption by increasing their opportunistic use of non-GAAP reporting. To our knowledge, this is the first documented evidence of any costs associated with clawback adoptions. These findings may have implications related to the mandatory adoption of clawbacks required under the Dodd-Frank Act of 2010. JEL Classification: M41, M43, G38