This study examines the incremental information in loss firms’ non-GAAP earnings disclosures relative to GAAP earnings. Using a large sample obtained through textual analysis and hand-collection, we posit and find that loss firms’ non-GAAP earnings exclusions offset the low informativeness of GAAP losses for forecasting and valuation. Loss firms’ non-GAAP earnings are highly predictive of future performance and are valued by investors, while the expenses excluded from GAAP earnings are not. Additional tests suggest that loss firms disclosing non-GAAP profits have significantly better future performance than GAAP-only loss firms and are not overvalued by investors. Comparing non-GAAP earnings of profitable firms to those of loss firms, we find that loss firms’ non-GAAP metrics are significantly more predictive and less strategic. We conclude that non-GAAP earnings disclosures are particularly informative about loss firms and help investors disaggregate losses into components that have differential implications for forecasting and valuation.

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Keywords disclosure, earnings persistence, G14, information uncertainty, loss firms, M41, M48, non-GAAP, pro forma, textual analysis, valuation
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Journal Journal of Accounting Research
Leung, P.Y.E, & Veenman, D. (2018). Non-GAAP Earnings Disclosure in Loss Firms. Journal of Accounting Research, 56(4), 1083–1137. doi:10.1111/1475-679X.12216