Do Non-GAAP Expense Exclusions Mislead Investors?

A firm has two options when reporting its quarterly and annual earnings: It can report earnings based on generally accepted accounting principles (GAAP), or it can report non-GAAP earnings by excluding (adding) certain expenses that will increase (decrease) its non-GAAP earnings relative to its GAAP earnings. As the rate of non-GAAP reporting has increased, the Securities and Exchange Commission (SEC) has expressed concern that this practice has the potential to mislead investors. In line with this, the academic literature is also mixed when it comes to the usefulness of non-GAAP reporting. In our paper, we further examine firms’ use of … Read more