In recent years, public firms in the U.S. have increasingly issued revenue guidance that is not based on Generally Accepted Accounting Principles (GAAP). Instead, they have focused on customized, non-GAAP metrics such as “organic revenue” or “constant-currency revenue.” Non-GAAP revenue guidance represents deviations from the top-line item of the income statement upon which most other performance analyses are based, raising the Securities and Exchange Commission’s (SEC’s) concerns over its use when firms communicate with analysts, investors, and other information users. Recently, the Financial Accounting Standards Board (FASB) called for comments on a proposal to standardize firms’ use of alternative performance metrics, including “organic sales growth.” Our new paper focuses on this novel and critical corporate reporting phenomenon and provides timely and relevant evidence for capital market regulators and standard setters.

We study the voluntary disclosure of non-GAAP revenue forecasts of S&P 1500 firms from 2005 to 2021. Our dataset, derived from the LSEG Guidance Reports (GR), allows us to accurately identify firm-issued non-GAAP revenue guidance from a wide range of disclosure events. Using textual analysis, we also classify non-GAAP revenue guidance into various categories, such as “organic” revenues (which exclude the effects of acquisitions or divestitures), “constant-currency” revenues (which adjust for foreign exchange fluctuations), and “organic constant-currency” revenues (the combination of the previous two categories), among others.

We find a dramatic increase in the use of non-GAAP revenue guidance over the years.  While only 1.5 percent of S&P 1500 firms issued non-GAAP revenue guidance in 2005, the rate increased to 22.7 percent in 2021, with a peak of 30.2 percent in 2015. Interestingly, we observe a sharp increase in the rate of non-GAAP revenue guidance after 2012, when it surged from 3.9 percent in 2012 to 30.2 percent in 2015. This surge coincides with key regulatory and economic changes: (1) the SEC’s 2010 interpretive guidance (C&DIs) on non-GAAP measures, (2) the implementation of ASC 606 in 2014, which changed the accounting standard on GAAP revenue recognition, and (3) the most recent and economically significant M&A wave that started in 2013.

We find that firms most frequently guide on “organic” revenues and “constant-currency” revenues. They are more likely to issue non-GAAP revenue guidance when they are larger, have greater growth opportunities, experience special items, and undergo mergers. Moreover, these firms also tend to have less persistent future GAAP revenues and lower future GAAP revenue growth, raising interesting questions about whether this type of guidance is used to enhance transparency or to manage analysts’ and investors’ perceptions.

When examining the consequences of non-GAAP revenue guidance, we focus on whether analysts and investors consider it in their decision-making. Our evidence suggests that non-GAAP revenue guidance improves the accuracy of analysts’ revenue and earnings forecasts, suggesting that non-GAAP revenue guidance can provide analysts with useful information for understanding firms’ future performance – particularly when the guidance disaggregates complex drivers of growth, such as M&A or foreign currency effects.

Importantly, when examining cross-sectional variation across the different non-GAAP revenue adjustments, we find that not all categories of non-GAAP revenue guidance are equally informative. For instance, organic revenue guidance is associated with more optimistic analyst forecasts, especially after negative revenue surprises. We do not observe a similar effect for other categories of non-GAAP revenue guidance. The fact that some non-GAAP revenue metrics lead to an increase in analysts’ optimism raises concerns about the possibility of misleading non-GAAP revenue guidance. In particular, firms might use the flexibility and discretion inherent in defining organic growth to provide an overly optimistic signal of future performance.

In exploring whether non-GAAP revenue guidance influences investors’ responses to revenue news, we find that investors respond more enthusiastically when firms issue non-GAAP revenue guidance concurrently with earnings reports, implying the pricing relevance of non-GAAP revenue guidance. Importantly, this response persists in subsequent periods, suggesting that investors do not overreact to non-GAAP revenue guidance and that our results are unlikely to be attributable to the mispricing of non-GAAP revenue information.

Our evidence has timely implications for debates among regulators and standards setters. On the regulatory side, the SEC has long expressed skepticism about non-GAAP revenue adjustments that alter the foundation of financial performance reporting and analysis. The fear is that firms might use non-GAAP revenue guidance to present future performance in an overly optimistic manner. On the one hand, we find that analysts and investors appear to derive information from non-GAAP revenue guidance that adjusts for mergers, acquisitions, divestures, foreign exchange, and other adjustments. On the other hand, certain categories of non-GAAP revenue guidance are also associated with an increase in analyst forecast optimism, suggesting that firms’ non-GAAP revenue metrics should be monitored closely. While we  provide the first evidence on this novel disclosure trend, it would be useful for future research to continue to explore these two potential motivations to further facilitate the SEC’s regulatory efforts.

Our evidence is also relevant to the FASB’s decision about whether to standardize key performance indicators, including non-GAAP revenue metrics. Our results suggest that the definitions of organic growth vary widely across firms, affecting how useful they may be  to analysts and investors. These results provide the FASB with unique insights into how firms use non-GAAP revenue metrics in disclosing forward-looking information, which is an important dimension of corporate reporting.

The rise of non-GAAP revenue guidance reflects changes in demand from analysts, investors, and other financial information users. It also provides evidence of managers’ increasing discretion in corporate reporting. While these disclosures can enhance clarity around core operations and future performance, they also raise new challenges for ensuring accountability, consistency, and investor protection. Our results inform the discussions among the SEC, the FASB, and practitioners about non-GAAP reporting.

This post comes to us from professors Theodore Christensen at the University of Georgia, Edgar Rodriguez-Vazquez at Baruch College – CUNY,  Xiaoxi Wu at Bocconi University, and PhD student Lynn Davis at the University of Georgia. It is based on their recent study, “The Voluntary Disclosure of Non-GAAP Revenue Guidance” available here.