INTANGIBLE-INTENSIVE FIRMS AND PERFORMANCE REPORTING

Abstract

A long-standing and intense debate centers on whether accounting information is less relevant for intangible-intensive firms because US GAAP requires most intangible investments to be expensed as incurred, potentially reducing the usefulness of earnings in measuring economic performance. We explore a voluntary disclosure that potentially provides performance-relevant information with less disclosure of project-level information that would elevate proprietary costs. We provide evidence that intangible-intensive firms are more likely than other firms to report non-GAAP earnings—an increasingly popular form of voluntary disclosure—particularly when GAAP earnings lack relevance. We also find that the items excluded when calculating intangible-intensive firms’ non-GAAP earnings are of higher quality than the items excluded by other firms. Considering the unique challenges faced by intangible-intensive firms in measuring economic performance, we conjecture that the enhanced informativeness of non-GAAP earnings may stem from these firms’ higher propensity to exclude investment-related expenditures, which must be expensed under GAAP but economically reflect investments. Supporting this premise, we find that the return to intangible investments is greater when firms report non-GAAP metrics. Collectively, our results suggest that intangible-intensive firms’ non-GAAP performance metrics are both systematically distinct, and incrementally beneficial relative to other firms. 

Keywords: Intangible-Intensive Firms, Knowledge Firms, Performance Reporting, Earnings Relevance, Innovation; Non-GAAP Reporting, Investment efficiency, Return on Intangible Investment