Non-GAAP Reporting and Investment

80 Pages Posted: 20 Dec 2019 Last revised: 23 May 2022

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: May 23, 2022

Abstract

When investors use GAAP earnings to value firms’ shares, managers’ investments into intangible assets become sensitive to transitory earnings. Non-GAAP earnings can remove these transitory earnings, and thus improve investment efficiency, but also introduce opportunistic bias, and thus hide inefficient investment. We quantify this trade-off by estimating a dynamic model in which a manager makes investment and non-GAAP disclosure decisions. We find the manager’s ability to bias non-GAAP earnings creates inefficient investment choices and destroys firm value. We estimate the magnitude of overinvestment at 6% and the corresponding loss in the average firm value at just under 1%.

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 (May 23, 2022). Chicago Booth Research Paper No. 19-27, Available at SSRN: https://ssrn.com/abstract=3507069 or http://dx.doi.org/10.2139/ssrn.3507069

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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