The Determinants and Informativeness of Non-GAAP Revenue Disclosures

65 Pages Posted: 10 Apr 2020 Last revised: 20 Jul 2020

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Kurt H. Gee

Penn State - Smeal College of Business

Zac Wiebe

University of Arkansas - Sam M. Walton College of Business

Date Written: July 17, 2020

Abstract

Although much is known about non-GAAP earnings disclosures, little is known about other non-GAAP measures. Approximately one in five earnings announcements includes a non-GAAP revenue measure, and these disclosures have recently attracted SEC scrutiny. Because revenue, unlike earnings, is a top-line number related exclusively to core business activities, it is less clear why adjustments to GAAP revenue would provide investors with useful information. Using a large, hand-collected sample of disclosures from 2015-2018, we present the first archival analysis of non-GAAP revenues and offer three key findings. First, firms are more likely to disclose non-GAAP revenue when GAAP revenue is incomparable with prior periods (e.g., when revenues are in a fluctuating foreign currency, when a merger or divestiture occurs, etc.), but are not more likely to disclose non-GAAP revenue to compensate for poor GAAP performance. Second, non-GAAP revenue growth conveys more information about firm value than GAAP revenue growth. Third, investors respond to non-GAAP revenue disclosures and non-GAAP revenue predicts future revenue better than GAAP revenue. These results suggest that non-GAAP revenue disclosures are, on average, motivated by economic fundamentals rather than managerial opportunism, and that non-GAAP revenues provide investors with incremental useful information beyond GAAP revenue. Relative to non-GAAP earnings, our results suggest that non-GAAP revenue disclosures have different determinants, are incrementally value relevant, and are less likely to be reflected in information provided by analysts. Overall, we find that non-GAAP revenue is a distinct disclosure phenomenon that typically reflects an attempt to inform rather than to mislead investors.

Keywords: Non-GAAP financial measures; revenue; voluntary disclosure; value relevance

JEL Classification: M40; M41; M48

Suggested Citation

Campbell, John L. and Gee, Kurt H. and Wiebe, Zac, The Determinants and Informativeness of Non-GAAP Revenue Disclosures (July 17, 2020). Available at SSRN: https://ssrn.com/abstract=3564204 or http://dx.doi.org/10.2139/ssrn.3564204

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Kurt H. Gee

Penn State - Smeal College of Business

354 Business Building
University Park, PA 16802
United States

Zac Wiebe

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

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