Non-GAAP Earnings and Corporate Investment
46 Pages Posted: 21 Apr 2016 Last revised: 5 Feb 2019
Date Written: January 22, 2019
Most definitions of non-GAAP earnings are calculated to exclude the effects of acquisition and restructuring expenses, asset write-downs, and intangible asset amortization. I hypothesize that managers who report non-GAAP earnings place lower weight on the excluded expenses in their corporate investment decisions. Consistent with this hypothesis, I find that firms with a history of reporting non-GAAP earnings engage in more and larger acquisitions and have higher total capital investment. I also find that high capital expenditures are concentrated among firms whose non-GAAP earnings are calculated to exclude depreciation expense (i.e., firms that report EBITDA). Finally, I find that acquisition-related restructuring activities of firms reporting non-GAAP earnings were less sensitive to a rule change affecting the recognition of restructuring expense. Overall, these findings are consistent with the notion that managers’ corporate investment strategies are influenced, or at least revealed, by non-GAAP earnings.
Keywords: Non-GAAP Earnings; Corporate Investment; Acquisitions; Layoffs; SFAS 141(R)
JEL Classification: M20; M40; M41
Suggested Citation: Suggested Citation