Non-GAAP Reporting and Investment

57 Pages Posted: 20 Dec 2019

See all articles by Charles McClure

Charles McClure

University of Chicago Booth School of Business

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business

Date Written: December 19, 2019


GAAP earnings often contain transitory items that can distort firms’ investment decisions when a manager cares about his firm’s stock price. Non-GAAP earnings can alleviate investment distortions because they allow the manager to remove transitory items. In addition to removing transitory items, the manager can also opportunistically bias non-GAAP earnings. We quantify this trade-off by estimating a dynamic model in which the manager makes an investment and a non-GAAP disclosure decision, and where the stock market rationally anticipates the manager’s incentives. The estimated parameters suggest managers care about stock prices significantly more than fundamentals. In the estimated model, investment and non-GAAP disclosure serve as complements. Because of that, relative to a scenario where managers can only provide GAAP earnings, managers who can provide non-GAAP earnings increase investment, but do so opportunistically. We find that permitting bias in non-GAAP earnings creates inefficient investment choices and destroys firm value. We estimate the magnitude of the loss in the firm value at 57 basis-points.

Keywords: Non-GAAP, pro-forma, investment, intangible assets, real effects, structural estimation

Suggested Citation

McClure, Charles and Zakolyukina, Anastasia A., Non-GAAP Reporting and Investment (December 19, 2019). Chicago Booth Research Paper No. 19-27, Available at SSRN: or

Charles McClure

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Anastasia A. Zakolyukina (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773.834.4838 (Phone)
773.926.0941 (Fax)

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