Comparing Non-GAAP EPS in Earnings Announcements and Proxy Statements

Abstract

We compare non-GAAP earnings per share (EPS) in firms’ annual earnings announcements and proxy statements using hand-collected data from U.S. Securities and Exchange Commission filings. We find that proxies for capital market incentives (contracting incentives) are more highly associated with firms’ disclosure of non-GAAP EPS in annual earnings announcements (proxy statements). However, we find systematic differences in the properties of firms’ non-GAAP earnings and exclusions depending on whether they disclose non-GAAP EPS in both the earnings announcement and the proxy statement. When firms disclose non-GAAP EPS in both documents, we find that non-GAAP EPS is more useful for assessing firm value. Specifically, these firms are more likely to: (1) exclude nonrecurring items, (2) exclude less persistent earnings components, and (3) provide less aggressive non-GAAP EPS. Our results suggest that non-GAAP EPS is higher in quality for investors when disclosed in both the annual earnings announcement and the proxy statement. We provide some of the first large-sample evidence consistent with the use of non-GAAP EPS metrics in both financial reporting and compensation contracting. This paper was accepted by Brian Bushee, accounting.

CEO compensation and real estate prices: pay for luck or pay for action?

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Blockchain in accounting research: current trends and emerging topics

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CEO performance‐based grants’ vesting provisions and debt contracts: Evidence from GAAP, Non‐GAAP and KPI metrics

“…Consistent with this argument, prior research suggests that non‐GAAP earnings are more persistent and more informative to equity investors than GAAP earnings (Bhattacharya et al., 2003; Curtis et al., 2014). Recent evidence indicates that non‐GAAP measures are of higher quality and are used for valuation purposes when capital market and contracting incentives are aligned—that is, equity investors rely on these measures to a greater extent because compensation committees rely on these measures for internal performance evaluation (Black et al., 2021, 2022). Based on this perspective, it is possible that debtholders might view grants based on non‐GAAP measures to be beneficial, especially since predicting future cash flows and accessing the firm's ability to make interest and principal payments are relevant to debtholders.…”

“…We present descriptive statistics on the evolution of p‐c grants with GAAP, non‐GAAP and KPI‐based vesting provisions. Although prior studies suggest that non‐GAAP earnings used in performance covenants can improve the efficiency of debt contracts (Dyreng et al., 2017) and that non‐GAAP earnings reported in both earnings announcements and proxy statements are of higher quality making them useful for valuation purposes (Black et al., 2022), there is limited evidence on the influence of non‐GAAP performance measures on debt contracts. Thus, our evidence extends prior research by examining whether and how the use of novel compensation mechanisms (p‐c grants based on GAAP and non‐GAAP vesting provisions) is interpreted by debtholders.…”