Do Non-GAAP Earnings Adjustments Deliver Comparability Benefits?

Abstract

This paper examines the comparability of non-GAAP earnings. Recent work on earnings comparability focuses on GAAP earnings despite non-GAAP earnings being widely used by both firms and financial statement users. Using the De Franco et al. (2011) method, we quantify the comparability of a suite of GAAP and non-GAAP earnings metrics. The findings indicate that street earnings are significantly more comparable than GAAP earnings, supporting the benefit of non-GAAP adjustments by analysts. Moreover, the superior comparability of street earnings is likely attributed to the removal of material nonrecurring items and recurring items with considerable measurement errors. In the supplementary analysis, we find that street earnings bring greater comparability improvement for firms that are larger, followed by more analysts, and have more volatile returns.