An Empirical Investigation of Non-GAAP Exclusion Quality Indicators

58 Pages Posted: 23 Sep 2020 Last revised: 5 Feb 2021

See all articles by Owen Davidson

Owen Davidson

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

Enrique Gomez

Temple University

Frank Heflin

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

Dana Wallace

University of Central Florida - School of Accounting

Date Written: July 1, 2020

Abstract

We examine commonly used indicators of low non-GAAP earnings quality and find that, contrary
to researchers’ intentions, most indicators identify firm-quarters with excluded earnings
components that (1) have relatively low persistence for future firm performance, and (2) improve
the value relevance of earnings when excluded. We conclude that existing indicators of non-GAAP
earnings quality perform poorly at identifying low-quality non-GAAP earnings. We propose a new
indicator that relies on identifying firm-quarters where GAAP earnings quality is high but
managers disclose non-GAAP earnings anyway. We find this indicator performs far better at
identifying firm-quarters with low-quality non-GAAP earnings. Our results are robust to a variety
of specification checks.

Keywords: Non-GAAP Earnings, Voluntary Disclosure, Earnings Quality, Benchmark Beating

JEL Classification: M40, M41

Suggested Citation

Davidson, Owen and Gomez, Enrique and Heflin, Frank and Wallace, Dana, An Empirical Investigation of Non-GAAP Exclusion Quality Indicators (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3669816 or http://dx.doi.org/10.2139/ssrn.3669816

Owen Davidson

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

Athens, GA 30602
United States

Enrique Gomez

Temple University ( email )

Philadelphia, PA 19122
United States

Frank Heflin (Contact Author)

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

Athens, GA 30602
United States
706-542-1616 (Phone)
706-542-3630 (Fax)

Dana Wallace

University of Central Florida - School of Accounting ( email )

Kenneth G. Dixon School of Accounting
P.O. Box 161400
Orlando, FL 32316-1400
United States

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