Do Non-GAAP Exclusions Impact the Extent to Which Current Returns Reflect Future Earnings Information?

Abstract

Motivated by regulators’ concerns about non-GAAP financial measures and building on research that finds more informative disclosures allow current stock returns to better reflect future earnings, I examine whether non-GAAP earnings exclusions enhance or garble the future earnings news captured in current stock returns. Utilizing a novel data collection technique using Amazon Mechanical Turk (MTurk), I collect non-GAAP earnings data from 2003 to 2012 and measure managers’ non-GAAP exclusions relative to three comparable earnings: (1) GAAP earnings before extraordinary items, (2) GAAP earnings from operations, and (3) analyst-adjusted “street earnings.” I find a negative association between the magnitude of managers’ non-GAAP exclusions and the extent to which current returns reflect future earnings information. Additional tests reveal this negative association is due to income-increasing exclusions. I find similar results using the association between current returns and either future earnings from operations or future non GAAP earnings. I also provide evidence of increased garbling of future earnings news when managers use incremental non GAAP exclusions to meet or beat the consensus earnings forecast. Finally, I find that consistent non-GAAP reporting is associated with more future earnings information reflected in current stock returns.