Experience with Non-GAAP Earnings and Investors’ Pricing of Exclusions

Abstract

We examine whether experience with non-GAAP earnings and the corresponding exclusions influences investors’ pricing of non-GAAP exclusions, where exclusions are the amounts removed from GAAP earnings to calculate non-GAAP earnings. We proxy for experience with the frequency with which managers or analysts provide non-GAAP earnings for the firm over the prior eight quarters. We find evidence of a benefit of this experience—lower information processing costs on average. Absent recent manager- or analyst-provided non-GAAP earnings, investors appear to over-estimate the persistence of exclusions at the earnings announcement, which corrects in the following months. Cross-sectional tests corroborate our inferences that experience with non-GAAP earnings reduces investors’ information processing costs. Overall, our results point to a capital markets consequence of non-GAAP earnings prevalence, which may be informative for managers as they form their firms’ disclosure policies and regulators who continue to monitor non-GAAP disclosures.

Keywords: Non-GAAP earnings, valuation, analysts, information processing costs

JEL Classification: M40, M41