Non-GAAP Earnings and Definite-Lived Intangible Asset Allocations in Mergers and Acquisitions

Abstract

ABSTRACT We test whether firms that exclude the effects of amortization from non-GAAP earnings allocate more of an acquisition’s purchase price to definite-lived intangible assets (DLIA). This strategy can yield two potential benefits: it can (1) increase non-GAAP earnings by shifting depreciation of tangible assets, which is often included in non-GAAP earnings, to amortization of DLIA, which non-GAAP earnings exclude, and (2) decrease the likelihood of future impairments by shifting allocations from goodwill to DLIA. Consistent with expectations, we find that non-GAAP-reporting firms that exclude amortization from non-GAAP earnings allocate more of the purchase price to DLIA. We also find that these firms allocate less of the purchase price to depreciable assets and goodwill. Finally, we document earnings surprise and valuation benefits related to these allocation choices. Overall, our results provide new evidence about non-GAAP reporting and purchase price allocations and suggest that non-GAAP reporting can influence management’s GAAP accounting choices. Data Availability: All data are publicly available from sources described in the paper. JEL Classifications: M40; M41; M45.