The risk-relevance of non-GAAP earnings

Abstract

We study the risk-relevance of non-GAAP earnings. Risk is an important earnings attribute in valuation models and the FASB’s conceptual framework identifies providing information about risk as a primary objective for earnings. Although prior research addresses the value-relevance of non-GAAP earnings, researchers have paid little attention to their risk-relevance. We find that non-GAAP adjustments yield an earnings number that isolates the more risk-relevant components of earnings. Excluded earnings components, however, contain some, albeit less, information about risk. Thus, although non-GAAP earnings can help investors prioritize the more versus less risk-relevant components of earnings, non-GAAP earnings are potentially most informative about risk when used together with GAAP earnings.

Keywords: non-GAAP earnings, non-GAAP exclusions, special items, other item exclusions, equity risk, risk-relevance

JEL Classification: D82, M41