Non-GAAP Reporting and Investment

Forthcoming, The Accounting Review; DOI: 10.2308/TAR-2021-0384

Chicago Booth Research Paper No. 19-27

73 Pages Posted: 20 Dec 2019 Last revised: 4 Oct 2023

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: September 9, 2023

Abstract

The wide-spread reporting of non-GAAP earnings suggests efficiency gains from doing so. By estimating a dynamic investment model, we examine the real implications of investors using both GAAP and non-GAAP earnings to value firms. When investors use the firm’s GAAP earnings only, the firm’s manager—who cares about current stock prices—underinvests, and his investment is sensitive to transitory earnings. Non-GAAP earnings can improve investment efficiency by adjusting for these transitory earnings, but can also hide inefficient investment by introducing opportunistic bias. Although non-GAAP earnings induce overinvestment, they dominate GAAP-only reporting. Counterfactual analysis reveals supplementing GAAP earnings with biased non-GAAP earnings increases firm value by 3.4% relative to GAAP-only reporting. Precluding bias reduces overinvestment and further increases firm value by 1%.

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

JEL Classification: E22, G31, G34, M40

Suggested Citation

McClure, Charles and Zakolyukina, Anastasia A., Non-GAAP Reporting and Investment (September 9, 2023). Forthcoming, The Accounting Review; DOI: 10.2308/TAR-2021-0384, 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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