The Earnings Persistence,Value Relevance And Executive Compensation Effects Of GAAP Earnings And Non–GAAP Earnings

Recently,the use of non-GAAP earnings is controversial and has come under the scrutiny of both regulators and researchers.Non-GAAP earnings is conceptually similar to pro forma earnings in the United States(U.S.),in that certain extraordinary items are removed from GAAP earnings.Although most researches has proved that non-GAAP earnings are a more value relevant measure than GAAP earnings,the disclosure of the Non-GAAP earnings is still controversial.As managers have significant discretion as to whether they report a non-GAAP earnings number,and what exclusions might enter that number,so non-GAAP measures are sometimes used to control earnings.For now,IASB and FASB has abandoned the rules of listing extraordinary items summarily.FASB issued an exposure draft about abandoning the extraordinary items in 2015.IASB cancelled the summary list of extraordinary items,and only allowed six important items shown separately in the profit statement as early as the 2003.In China,irregular items are similar to extraordinary items,and net profit after irregular items is similar to Non-GAAP earnings.The CSRC required the disclosure of net profit after irregular items reveals out the balance sheet in annual financial report by its registered public-held companies since 1999.In this paper,we do a comb of the regulation of irregular items,and in accordance with the division of time interval to explore the following aspects:(1)The value relevance of the non-recurring gains and losses and the incremental value relevance of profits after deduction of extraordinary earnings;(2)The earnings persistence of the non-recurring gains and losses and the incremental earnings persistence of profits after deduction of extraordinary earnings;(3)The effects on executive compensation of non-recurring gains and losses and the profits after deduction of extraordinary earnings.Conclusion shows that from 2008 to 2015,non-recurring gains and losses do not have earnings persistence and the profits after deduction of extraordinary earnings have stronger persistence than net income.In the factor of value relevance,the value relevance of non-recurring gains is less than the regular earnings,and non-recurring losses does not have value relevance.Compared with the result of 2001-2007,we found that the market validity of our country’s stock market has the enhancement and investors gradually tend to be more rational.This article also does the research about the correlation between non-recurring gains and losses and executive compensation.Results show that the non-recurring gains do not related with executive pay,and the non-recurring losses showed a significant positive correlation.That means that the executive compensation mechanism of listed companies of our country has certain validity and executives can make to put more energy on the operating main business.But the impact of non-recurring profit and loss still cannot be completely ruled out.