Non-GAAP Earnings: A Consistency and Comparability Crisis?

49 Pages Posted: 7 Apr 2016 Last revised: 19 Jun 2018

See all articles by Dirk E. Black

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Jack T. Ciesielski

R.G. Associates

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: June 9, 2018

Abstract

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

Black, Dirk E. and Christensen, Theodore E. and Ciesielski, Jack T. and Whipple, Benjamin C., Non-GAAP Earnings: A Consistency and Comparability Crisis? (June 9, 2018). Tuck School of Business Working Paper No. 2759312. Available at SSRN: https://ssrn.com/abstract=2759312 or http://dx.doi.org/10.2139/ssrn.2759312

Dirk E. Black (Contact Author)

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Jack T. Ciesielski

R.G. Associates ( email )

United States

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,121
Abstract Views
2,907
rank
18,127
PlumX Metrics