Non-GAAP Earnings: A Consistency and Comparability Crisis?

We explore how the discretion afforded in non-GAAP reporting influences earnings consistency and comparability, two tenets of GAAP-based earnings. Using a novel dataset of non-GAAP disclosures, we first provide evidence on the current state of non-GAAP reporting, finding that non-GAAP earnings have become increasingly common in recent years and that 71% of our sample firms report a non-GAAP metric in 2014. Second, we construct within-firm measures of non-GAAP reporting consistency. We find that firms generally modify their non-GAAP calculations over time to provide more informative earnings metrics, contrary to concerns that managers inconsistently calculate non-GAAP earnings to obscure financial performance. Finally, we explore how non-GAAP adjustments affect the comparability of performance metrics across sector peers. We find that non-GAAP reporting results in more comparable earnings metrics across peers relative to GAAP earnings. We also find that, on average, firms vary their non-GAAP calculations from those of their sector peers for informative reasons, while sector-wide exclusions represent lower quality adjustments.