Articlegreen2020

The Determinants and Informativeness of Non-GAAP Revenue Disclosures

John L. Campbell · Kurt H. Gee · Zac Wiebe

53 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Accounting and Organizational Management

Abstract

ABSTRACT Most research on non-GAAP financial measures focuses on earnings or earnings per share, although non-GAAP revenue disclosure has recently attracted SEC scrutiny. It is unclear ex ante what non-GAAP adjustments could improve revenue's usefulness because, unlike earnings, revenue is a top-line number related primarily to core (i.e., persistent) business activities. We present the first archival analysis of non-GAAP revenues using a large, hand-collected sample of disclosures from 2015 to 2018. Approximately one in five earnings announcements contains a non-GAAP revenue disclosure, focused on revenue growth. Our evidence suggests that firms disclose non-GAAP revenue when GAAP revenue is incomparable with prior periods, and not to compensate for poor GAAP performance. Furthermore, non-GAAP revenue growth predicts future revenue growth better than GAAP revenue growth, and the market responds to this information. Overall, non-GAAP revenue disclosures are motivated by economic fundamentals rather than opportunism, on average, and they provide investors with relevant information.

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References

1995Earnings, Book Values, and Dividends in Equity Valuation*1989Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?1990Evidence that stock prices do not fully reflect the implications of current earnings for future earnings 2009Driven to Distraction: Extraneous Events and Underreaction to Earnings News 2008Financial Accounting Standards Board (FASB)2011Measuring Securities Litigation Risk 2002GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings 2003Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings

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2023Differences in the value relevance of identifiable intangible assets 2019SEC Non-GAAP Comment Letters and Firm Disclosures 2023Properties of accounting performance measures used in compensation contracts

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