Beating Strategic Earnings Benchmarks with Non-GAAP Figures: International Evidence* (original) (raw)
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The practice of reporting earnings measures that deviate from generally accepted accounting principles (non-GAAP measures) has received negative attention in the media. Regulators argue in favour of reporting GAAP earnings measures and utter their concerns that investors may be misled by the use of non-GAAP measures. In a period of increased regulatory concern for these reporting practices, we explore whether there has been a shift away from the use of non-GAAP metrics. We analyse a sample of earnings press releases in the period 1999-2004 from companies listed at Euronext Amsterdam. Our findings indicate that reporting non-GAAP measures is a common practice and that the frequency of reporting non-GAAP earnings measures has increased despite the concerns voiced by regulators. On the other hand, investors seem to have become more hesitant towards the use of alternative earnings measures for their decision-making. Our findings suggest that investors find non-GAAP measures informative before 2003, but they turn away from these measures in the following years and price GAAP earnings metrics instead. Together, these findings suggest that the negative media attention for non-GAAP measures has influenced the perception of investors, but not of managers.
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SSRN Electronic Journal, 2000
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For 2005 through 2010, we examine the extent to which S&P 100 companies provide non-GAAP income measures in their annual earnings releases. Our findings provide insight into the evolving nature and magnitude of the adjusting items characteristic of non-GAAP income measures during the post-Reg G period. We find that the number of S&P 100 companies disclosing a non-GAAP income measure increases significantly from 44% to 60% during our period of study. Based on Gray's (1980) index of materiality, we find that for each year between 2005 and 2010, the excess of non-GAAP income compared to GAAP income is 18%, 19%, 43%, 61%, 54%, and 45%, respectively. For approximately half of the S&P 100 disclosing non-GAAP income measures, we identify repetitive adjustments for the same item (e.g. restructuring) in multiple years. While none of these companies specifically refer to repetitive adjustments as non-recurring, infrequent or unusual, several include terminology alluding to the use of non-GAAP earnings to evaluate 'ongoing' operating trends. Thus, our findings suggest that a change in tone at the SEC has lead to the reappearance of the disclosure of non-GAAP performance measures that the Commission previously considered to be potentially misleading. In January 2010, the SEC relaxed its position on non-GAAP disclosures clarifying that the recurring item prohibition for SEC filings is based on the description of the item adjusted, not its nature. Finally, while most of the S&P 100 providing such disclosures indicate why management believes presentation of a non-GAAP financial measure is useful to investors, the rationales are typically general and broad and accordingly not informative.
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