Non-GAAP Earnings Disclosure in Loss Firms
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.
|Keywords||disclosure, earnings persistence, G14, information uncertainty, loss firms, M41, M48, non-GAAP, pro forma, textual analysis, valuation|
|Persistent URL||dx.doi.org/10.1111/1475-679X.12216, hdl.handle.net/1765/111239|
|Series||ERIM Top-Core Articles|
|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