Non-GAAP Earnings: A Consistency and Comparability Crisis?
48 Pages Posted: 7 Apr 2016 Last revised: 5 Feb 2020
Date Written: February 4, 2020
We use a novel dataset to examine the across-time consistency and across-firm comparability of firms’ non-GAAP earnings disclosures. We begin by identifying firms that change their non GAAP earnings definition across time, and find that these deviations are uncommon. However, when managers change their non-GAAP definitions, they appear to do so primarily for informative reasons. Next, 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. We also examine instances where firms deviate from the common sector-wide definition of non-GAAP earnings. We again find that managers’ efforts to provide an informative earnings metric primarily motivate these deviations. Finally, we examine several determinants of inconsistent and incomparable non-GAAP reporting. Although our primary evidence indicates that managers generally deviate from prior disclosures or sector norms for informative reasons, we find some evidence that these deviations are more likely to occur in aggressive non-GAAP reporting settings, such as benchmark beating or including positive nonrecurring items.
Keywords: Non-GAAP earnings, reporting consistency, earnings comparability
JEL Classification: G14, M40, M41, M48
Suggested Citation: Suggested Citation