Analyst-Adjusted Non-GAAP Earnings and the Exclusion of “Other Items”

• In Event: Non-GAAP Earnings: Opportunistic or Informative?

Abstract

Analysts’ motivations for making earnings adjustments in calculating non-GAAP earnings are not fully understood in the extant literature. Although their exclusion of transitory items in calculating non-GAAP earnings provides a better measure of firms’ core operating performance, their exclusion of recurring items appears inconsistent with providing a better measure of sustainable performance. Thus, some prior researchers conclude that analysts’ recurring exclusions are opportunistically motivated. I investigate potential incentives that could motivate analysts to exclude recurring items and find little evidence consistent with the opportunism explanation. Instead, the results suggest that analysts appear to have two primary motivations for excluding recurring items: (1) these recurring items relate to non-cash transactions that are irrelevant to investors in assessing firm performance and (2) analysts do not forecast “recurring earnings” for these firms, causing them to exclude certain recurring items in calculating non-GAAP earnings to maintain comparability with their forecasts.

Author

• Benjamin Curtis Whipple, The University of Utah