Non-GAAP Earnings: A Consistency and Comparability Crisis?
46 Pages Posted: 7 Apr 2016 Last revised: 1 Dec 2020
Date Written: October 17, 2020
We use a novel dataset to examine the across-time consistency and across-firm comparability of firms’ non-GAAP earnings disclosures. 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.
Keywords: Non-GAAP earnings, reporting consistency, earnings comparability
JEL Classification: G14, M40, M41, M48
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