The Determinants and Informativeness of Non-GAAP Revenue Disclosures
The Accounting Review, Vol. 97, pp. 23-48, 2022
Posted: 10 Apr 2020 Last revised: 6 Dec 2022
Date Written: January 13, 2022
Abstract
Nearly all research on non-GAAP measures focuses on earnings or earnings per share. Disclosure of non-GAAP revenue has recently attracted SEC scrutiny. Because revenue, unlike earnings, is a top-line number related primarily to core (i.e., persistent) business activities, it is unclear what adjustments could provide a more useful measure of performance. We present the first archival analysis of non-GAAP revenues based on a large, hand-collected sample of disclosures from 2015-2018. Approximately one in five earnings announcements contains a non-GAAP revenue disclosure, focused on revenue growth. Our evidence suggests that firms disclose non-GAAP revenue when GAAP revenue is incomparable with prior periods, and not to compensate for poor GAAP performance. Furthermore, non-GAAP revenue growth predicts future revenue growth better than GAAP revenue growth, and the market responds to this information. Overall, non-GAAP revenue disclosures are motivated by economic fundamentals rather than opportunism, on average, and they provide investors with relevant information.
Keywords: Non-GAAP financial measures; revenue; voluntary disclosure; predictive value; confirmatory value; standard setting; SEC scrutiny
JEL Classification: M40; M41; M48
Suggested Citation: Suggested Citation