Non-GAAP Earnings and the Earnings Quality Trade-off

47 Pages Posted: 14 Dec 2018

See all articles by Andrea Ribeiro

Andrea Ribeiro

NSW New South Wales (Government) - NSW Treasury

Yaowen Shan

University of Technology Sydney; Financial Research Network (FIRN)

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2, 2018

Abstract

Using a large sample of earnings press releases by Australian firms, we compare multiple attributes of non-GAAP earnings measures with their closest GAAP equivalent. We find that, on average, non-GAAP earnings are more persistent, smoother, more value-relevant, and have higher predictive power than their closest GAAP equivalent. However, the same set of non-GAAP earnings disclosures are also less conservative and less timely than their closest GAAP equivalent. The results are consistent with non-GAAP earnings measures reflecting a reversal of the trade-off between the valuation and stewardship roles of accounting inherent in accounting standards and the way they are applied. We also find that differences in several of these attributes between GAAP and non-GAAP earnings are more evident in larger firms, firms with lower market-to-book ratios, firms with a higher proportion of independent directors and firms that report profits rather than losses. Our evidence is consistent with the argument that accounting standards impose significant amounts of conditional conservatism at some cost to the valuation role of accounting information. Non-GAAP earnings measures can therefore be seen as a response to the challenges faced by a single GAAP performance measure in satisfying the competing demands of value relevance and stewardship.

Keywords: Non-GAAP disclosures, Earnings quality

JEL Classification: J33, M41

Suggested Citation

Ribeiro, Andrea and Shan, Yaowen and Taylor, Stephen L., Non-GAAP Earnings and the Earnings Quality Trade-off (November 2, 2018). Available at SSRN: https://ssrn.com/abstract=3277318 or http://dx.doi.org/10.2139/ssrn.3277318

Andrea Ribeiro

NSW New South Wales (Government) - NSW Treasury ( email )

Australia

Yaowen Shan (Contact Author)

University of Technology Sydney ( email )

PO Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://profiles.uts.edu.au/Yaowen.Shan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Stephen L. Taylor

University of Technology Sydney ( email )

UTS Business School
PO Box 123 Broadway
Sydney, NSW 2007
Australia
61295143437 (Phone)
61295143513 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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