Non-GAAP Earnings: A Consistency and Comparability Crisis?

48 Pages Posted: 7 Apr 2016 Last revised: 5 Feb 2020

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: February 4, 2020

Abstract

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

Black, Dirk E. and Christensen, Theodore E. and Ciesielski, Jack T. and Whipple, Benjamin C., Non-GAAP Earnings: A Consistency and Comparability Crisis? (February 4, 2020). 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

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