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- Title
Non-GAAP Reporting and Investment.
- Authors
McClure, Charles G.; Zakolyukina, Anastasia A.
- Abstract
The wide-spread reporting of non-GAAP earnings suggests efficiency gains from doing so. By estimating a dynamic investment model, we examine the real implications of investors using both GAAP and non-GAAP earnings to value firms. When investors use the firm's GAAP earnings only, the firm's manager—who cares about current stock prices—underinvests, and his investment is sensitive to transitory earnings. Non-GAAP earnings can improve investment efficiency by adjusting for these transitory earnings, but can also hide inefficient investment by introducing opportunistic bias. Although non-GAAP earnings induce overinvestment, they dominate GAAP-only reporting. Counterfactual analysis reveals supplementing GAAP earnings with biased non-GAAP earnings increases firm value by 3.4 percent relative to GAAP-only reporting. Precluding bias reduces overinvestment and further increases firm value by 1 percent. Data Availability: Data are available from the sources cited in the text. JEL Classifications: E22; G31; G34; M40.
- Subjects
FINANCIAL statements; INTANGIBLE property; ACCOUNTING standards; ENTERPRISE value; DECISION making in investments; DYNAMIC models; INVESTMENT management
- Publication
Accounting Review, 2024, Vol 99, Issue 2, p341
- ISSN
0001-4826
- Publication type
Article
- DOI
10.2308/TAR-2021-0384