Non-GAAP Earnings Disclosure in Loss Firms

61 Pages Posted: 19 Aug 2016 Last revised: 30 Apr 2018

See all articles by Edith Leung

Edith Leung

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

David Veenman

University of Amsterdam - Amsterdam Business School (ABS)

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2018

Abstract

This study examines the incremental information in loss firms’ non-GAAP earnings disclosures relative to GAAP earnings. Using a large sample obtained through textual analysis and hand-collection, we posit and find that loss firms’ non-GAAP earnings exclusions offset the low informativeness of GAAP losses for forecasting and valuation. Loss firms’ non-GAAP earnings are highly predictive of future performance and are valued by investors, while the expenses excluded from GAAP earnings are not. Additional tests suggest that loss firms disclosing non-GAAP profits have significantly better future performance than GAAP-only loss firms and are not overvalued by investors. Comparing non-GAAP earnings of profitable firms to those of loss firms, we find that loss firms’ non-GAAP metrics are significantly more predictive and less strategic. We conclude that non-GAAP earnings disclosures are particularly informative about loss firms and help investors disaggregate losses into components that have differential implications for forecasting and valuation.

Keywords: Non-GAAP, Pro forma, Disclosure, Valuation, Loss firms, Earnings persistence, Information uncertainty, Textual analysis

JEL Classification: G14, M41, M48

Suggested Citation

Leung, Edith and Veenman, David, Non-GAAP Earnings Disclosure in Loss Firms (April 20, 2018). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2825977 or http://dx.doi.org/10.2139/ssrn.2825977

Edith Leung

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

David Veenman (Contact Author)

University of Amsterdam - Amsterdam Business School (ABS) ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

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