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

50 Pages Posted: 14 Apr 2021 Last revised: 6 Sep 2022

See all articles by Sarah E. McVay

Sarah E. McVay

University of Washington

Edgar Rodriguez-Vazquez

City University of NY, Baruch College, Zicklin School of Business

Sara Toynbee

University of Texas at Austin

Date Written: September 5, 2022

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

Suggested Citation

McVay, Sarah E. and Rodriguez-Vazquez, Edgar and Toynbee, Sara, Experience with Non-GAAP Earnings and Investors’ Pricing of Exclusions (September 5, 2022). Available at SSRN: https://ssrn.com/abstract=3820094 or http://dx.doi.org/10.2139/ssrn.3820094

Sarah E. McVay

University of Washington ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://https://foster.uw.edu/faculty-research/directory/sarah-mcvay/

Edgar Rodriguez-Vazquez

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

Sara Toynbee (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

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