An Industry Approach to Assess the Popularity of Non-GAAP Financial Measure Disclosures

• In Event: Breakfast with Research Roundtable Forum Session
  In Paper Session: Roundtable 4: Financial Accounting III

Abstract

This study uses the defined-sample approach to address the non-GAAP financial measure disclosure issues, and the criterion selected to define the sample population is industry membership. To contrast the potential discrepancy between different industries' tendency in using non-GAAP financial measures, two industries are selected and studied: the consumer nondurables industry (SIC code 2000 to 2599) and the business services industry (SIC code 7370 to 7372). A total of 308 firms in the two industries are studied by collecting each firm's earnings press releases for 2017 first quarter.

Out of the defined sample of 308 firms, 289 press releases are collected and analyzed, we reached the following empirical findings. 1) Overall, the use of non-GAAP financial measures is more popular than previously reported (Marques 2006, Curtis McVay and Whipple 2014, Bentley et al. 2018). Up to 81.82% firms in the defined sample, report at least one non-GAAP financial measures, relative to previously reported around 68%. And, there is a significant industry effect on non-GAAP financial measure disclosures; the business service industry is using more non-GAAP financial measures than the consumer nondurables industry, consistent with previous study's finding (Bentley et al. 2018). 2) For firms do use non-GAAP financial measures, there is an industry preference as to which non-GAAP measure is more popular in that industry. While there is no significant difference in the disclosure of non-GAAP EPS/Net income, there is a higher tendency in reporting non-GAAP EBITDA (earnings before interest, taxes, depreciation and amortization) for the business service industry. The emphasis on EBITDA is partially driven by analysts' following.

This study contributes to our understanding of the popularity and the industry effects of non-GAAP financial measures. By using the defined-sample approach, as oppose to the keyword search approach employed by most previous studies, this study provides a more precise analysis within a defined sample population. It is acknowledged that limited by the sample size of only two industries, findings in this study can be preliminary, however, this study serves as one more step towards a deeper and more direct understanding of non-GAAP financial measure disclosures within specific industry groups of interests.

Authors

• Kang Cheng, Morgan State University

• Mohammad Tavakolifar, Morgan State University