The Determinants and Informativeness of Non-GAAP Revenue Disclosures

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 so it is less clear what adjustments would 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. 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 has information content for investors and predicts future revenue growth better than GAAP revenue growth. Overall, we provide evidence that, on average, non-GAAP revenue disclosures are motivated by economic fundamentals rather than opportunism and provide investors with relevant information.