10/11/2023
By Mary Lou Kelly

The Accounting Department at the Manning School of Business invites you to attend a doctoral dissertation proposal defense by Ye Zhu on “The Impact of Key Subordinate Managers’ Monitoring on The Quality of Non-GAAP Reporting."

Candidate Name: Ye Zhu
Degree: Ph.D. in Accounting
Date: Tuesday, Oct. 17, 2023
Time: 11 a.m. - 1 p.m.
Location: Pulichino Tong Business Center, Room 462

Committee Members:

  • Khondkar Karim, Committee Chair
  • Jingrong Lin, Member
  • Huimin Chen, Member
  • Chi Zhang, Member

Abstract:

In this study, I investigate the relationship between subordinate monitoring and non-GAAP reporting quality. I focus on two metrics to proxy for the degree of subordinate monitoring: the horizon and power. I predict that subordinates with longer horizons and greater power lead to more effective monitoring of the CEO, thus improving the non-GAAP reporting quality. By utilizing the number of years until subordinates’ retirement as a proxy for subordinates’ horizons and subordinates’ average compensation related to that of the CEO as a proxy for subordinates’ power, I find that subordinates with longer horizons are associated with improved non-GAAP reporting quality. It appears that CFOs exhibit distinct incentives compared to other subordinates in terms of financial reporting. That is, CFOs are not associated with improved non-GAAP reporting quality.

To explore the potential mechanisms that enhance subordinates’ monitoring, I analyze whether and how corporate opacity, firm complexity, and corporate governance affect the impact of subordinates’ monitoring on non-GAAP reporting quality. My findings reveal that the improvement in non-GAAP reporting quality is more pronounced in firms characterized by higher corporate opacity (proxied by higher analyst disagreement and lower accrual quality), greater firm complexity (proxied by higher R&D intensity and higher accounting reporting complexity), and weaker corporate governance (proxied by lower blockholders ownership).

Furthermore, I perform additional tests to gain deeper insights. I examine whether subordinates are associated with benchmark beating. The evidence reveals that subordinates rely on reporting non-GAAP earnings to signal earnings growth. CFOs tend to employ non-GAAP reporting to conceal losses. No evidence suggests that subordinates use non-GAAP reporting to meet and beat benchmarks. I also utilize Regulation G and Compliance and Disclosure Interpretations (C&DIs) issued by the SEC in 2003 and 2010 as shocks to subordinates’ monitoring. The findings demonstrate that Regulation G greatly enhances subordinates’ monitoring of the CEO’s misconduct.

Finally, I perform Heckman two-stage tests. The results align with the main inference that subordinates with long-term orientation alleviate excessive CEO short-termism, as evidenced by more informative non-GAAP reporting. Overall, the evidence I present offers fresh insights into the factors influencing firms’ non-GAAP reporting practices and sheds light on how subordinates’ monitoring influences voluntary disclosure.