Implications of Non-GAAP Earnings for Real Activities and Accounting Choices
53 Pages Posted: 21 Apr 2016 Last revised: 29 Jun 2019
Date Written: June 7, 2019
Non-GAAP earnings are almost always calculated to exclude the effects of acquisition and restructuring expenses, impairments, and intangible amortization. Managers who consistently report non-GAAP earnings act as if they place lower weight on these excluded expenses. Their firms pursue more and larger acquisitions, have higher total capital investment, and are more likely to restructure. Acquisition-related restructuring activities of firms reporting non-GAAP earnings were less sensitive to a rule change affecting the recognition of restructuring expense. Finally, firms with a history of reporting non-GAAP earnings record more discretionary asset impairments. As a consequence of these relations, firms reporting non-GAAP earnings have more persistent special-item expenses. Overall, these findings are consistent with the notion that non-GAAP earnings influence, or at least predict, firms’ real activities and accounting choices.
Keywords: Non-GAAP Earnings; Corporate Investment; Acquisitions; Layoffs; Impairments; SFAS 141(R)
JEL Classification: M20; M40; M41
Suggested Citation: Suggested Citation