Non-GAAP Earnings Disclosure in Loss Firms

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The heterogeneity among loss firms poses challenges to investors in forecasting and valuation. We examine whether non-GAAP disclosures help investors understand the nature and implications of GAAP losses. We hand-collect data on GAAP loss firms that disclose non-GAAP profits and find GAAP earnings of these firms are uninformative about future cash flows. In contrast, non-GAAP earnings are strongly informative, suggesting the items excluded from non-GAAP earnings eliminate the predictive ability of GAAP earnings. Similar results are obtained based on ERCs for GAAP versus non-GAAP earnings surprises. In addition, loss-converters have significantly stronger future cash flows, are more likely to return to profitability, and are less likely to delist than GAAP-only loss firms. Compared to matched profit firms, loss converters have similar future cash flows. Lastly, we find no evidence suggesting investors overvalue non-GAAP profits in loss firms. We conclude that non-GAAP earnings disclosures are particularly informative in loss firms.