Non‐GAAP Earnings Disclosure in Loss Firms

Posted: 6 Oct 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: September 1, 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 (September 1, 2018). Journal of Accounting Research, Vol. 56, No. 4, 2018, Available at SSRN: https://ssrn.com/abstract=3249108

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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