Non-GAAP Earnings: A Consistency and Comparability Crisis?
49 Pages Posted: 7 Apr 2016 Last revised: 19 Jun 2018
Date Written: June 9, 2018
We use a novel dataset to explore the consistency and comparability of non-GAAP earnings and examine how variation in these earnings properties affects non-GAAP reporting quality. First, we identify firms that change their non-GAAP earnings calculation over time and examine the quality of their inconsistent adjustments. When firms deviate from their historical definition of non-GAAP earnings, their deviations are comprised of high-quality adjustments, suggesting that managers change their calculations across time for informative reasons. Second, we examine whether non- GAAP earnings improve earnings comparability relative to GAAP earnings. Our evidence is consistent with firms’ non-GAAP adjustments enhancing the comparability of earnings metrics across sector peers. Finally, we examine instances where firms’ non-GAAP calculations deviate from the average sector-wide definition of non-GAAP earnings and again find that firms’ deviations are primarily motivated by a desire to inform. Overall, our evidence indicates that managers generally adjust their non-GAAP calculations across time, and relative to sector peers, to enhance the informativeness of the earnings metric.
Keywords: Non-GAAP earnings, reporting consistency, earnings comparability
JEL Classification: G14, M40, M41, M48
Suggested Citation: Suggested Citation