Local Political Corruption and Firm’s Non-GAAP Reporting

This study examines the influence of local political corruption on firm’s non-GAAP reporting. Using U.S. Department of Justice data on the number of government officials’ corruption convictions, we find that when facing a high corrupt local government, firms (1) are less likely to report non-GAAP earnings, (2) have less aggressive non-GAAP earnings disclosures, and (3) have a significant decline in the exclusion magnitudes of non-GAAP earnings. The results are robust to controlling demographic characteristics, employing three alternative corruption measures, using instrumental variable approach, and conducting difference-in-difference analysis based on firms’ relocation. Further, we find that the effect of local political corruption on firms’ non-GAAP earnings disclosure is more pronounced for firms with concentrated operations in their headquarter states. Overall, the results suggest that managing non-GAAP reporting is one channel through which firms could deter rent-seeking by corrupt local officials.