Non-GAAP Reporting and Investment
Forthcoming, The Accounting Review; DOI: 10.2308/TAR-2021-0384
73 Pages Posted: 20 Dec 2019 Last revised: 4 Oct 2023
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: Suggested Citation