Non-GAAP Earnings Disclosure in Loss Firms

Abstract

This study examines the incremental information in loss firms’ non-GAAP earnings disclosures relative to GAAP earnings. Using a large sample obtained through textual analysis and hand-collection, we posit and find that loss firms’ non-GAAP earnings exclusions offset the low informativeness of GAAP losses for forecasting and valuation. Loss firms’ non-GAAP earnings are highly predictive of future performance and are valued by investors, while the expenses excluded from GAAP earnings are not. Additional tests suggest that loss firms disclosing non-GAAP profits have significantly better future performance than GAAP-only loss firms and are not overvalued by investors. Comparing non-GAAP earnings of profitable firms to those of loss firms, we find that loss firms’ non-GAAP metrics are significantly more predictive and less strategic. We conclude that non- GAAP earnings disclosures are particularly informative about loss firms and help investors disaggregate losses into components that have differential implications for forecasting and valuation