Implications of Non-GAAP Earnings for Real Activities and Accounting Choices
58 Pages Posted: 21 Apr 2016 Last revised: 1 Oct 2020
Date Written: April 14, 2020
Managers almost always define non-GAAP earnings to exclude the effects of acquisition and restructuring expenses, the amortization of intangibles, and impairments. I find that managers with a history of reporting non-GAAP earnings act as if they place lower weight on these excluded expenses when making real activities and accounting choices. They pursue more and larger acquisitions, have higher total capital investment, are more likely to restructure, and are more likely to recognize discretionary impairments. In a difference-in-differences setting, I find that non-GAAP reporting firms are less likely to alter their restructuring activities following a significant change in accounting rules for restructuring expense recognition. Finally, in supplementary analyses, I find that non-GAAP-reporting firms tend to repeat these real activities and accounting choices year-after-year, resulting in more persistent special-item expenses.
Keywords: Non-GAAP Earnings; Corporate Investment; Acquisitions; Layoffs; Impairments; SFAS 141(R); Special Items
JEL Classification: M20; M40; M41
Suggested Citation: Suggested Citation