Non-GAAP Reporting and Investment
McClure, Charles G., Zakolyukina, Anastasia A.
The Accounting Review · 2024 · Volume 99 · Issue 2
Abstract
The wide-spread reporting of non-GAAP earnings suggests efficiency gains from doing so. By estimating a dynamic investment model, we examine the real implications of investors using both GAAP and non-GAAP earnings to value firms. When investors use the firm’s GAAP earnings only, the firm’s manager—who cares about current stock prices—underinvests, and his investment is sensitive to transitory earnings. Non-GAAP earnings can improve investment efficiency by adjusting for these transitory earnings, but can also hide inefficient investment by introducing opportunistic bias. Although non-GAAP earnings induce overinvestment, they dominate GAAP-only reporting. Counterfactual analysis reveals supplementing GAAP earnings with biased non-GAAP earnings increases firm value by 3.4 percent relative to GAAP-only reporting. Precluding bias reduces overinvestment and further increases firm value by 1 percent. Data Availability:Data are available from the sources cited in the text. JEL Classifications:E22; G31; G34; M40.
Keywords
non-GAAP, pro-forma, investment, intangible assets, real effects, structural estimation
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