Non-GAAP Earnings: A Consistency and Comparability Crisis?

Posted: 8 Feb 2021

See all articles by Dirk E. Black

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Theodore E. Christensen

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

Jack T. Ciesielski

R.G. Associates

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2020

Abstract

We use a novel data set to examine the across-time consistency and across-firm comparability of firms’ non-GAAP earnings disclosures. Given widespread concern about non-GAAP reporting among regulators, standard setters, the investor community, and academics, our investigation provides timely evidence on how managers’ deviations from their own non-GAAP disclosure history, or the reporting of industry peers, affects how well earnings inform on firm performance. We begin by identifying firms that change their non-GAAP earnings definition from one year to the next. These deviations are uncommon, but when managers change the items they exclude in calculating non-GAAP earnings, the changes generally enhance the information in earnings about firms’ core performance. We also examine whether non-GAAP earnings are more comparable than GAAP earnings and find that firms’ non-GAAP adjustments result in greater earnings comparability. Finally, we examine instances in which firms deviate from common sector-wide definitions of non-GAAP earnings. We find that these deviations also result in earnings metrics that better represent firms’ core operations. Overall, our results suggest that when managers vary their non-GAAP calculations, either across time or across firms, the resulting non-GAAP metrics generally enhance the information in earnings about firms’ ongoing performance. Thus, our analysis helps mitigate concerns about why managers might vary their non-GAAP reporting calculations.

Keywords: non-GAAP earnings, voluntary disclosure, reporting consistency, earnings comparability

JEL Classification: G14, M40, M41, M48

Suggested Citation

Black, Dirk E. and Christensen, Theodore E. and Ciesielski, Jack T. and Whipple, Benjamin C., Non-GAAP Earnings: A Consistency and Comparability Crisis? (December 21, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3769094

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Theodore E. Christensen (Contact Author)

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

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Jack T. Ciesielski

R.G. Associates ( email )

United States

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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