Black VD (2018) Non-Gaap Reporting: Evidence From Academia and Current Practice

DOI: 10.1111/jbfa.
12298
Non-GAAP reporting: Evidence from academia and

current practice
Dirk E. Black1 Theodore E. Christensen2 Jack T. Ciesielski3
Benjamin C. Whipple2
1 Dartmouth College, Tuck School of Business,
Hanover, New Hampshire, USA Abstract

2 University of Georgia, J. M. Tull School of The number of firms reporting earnings on a non-GAAP basis has
Accounting, Athens, Georgia, USA increased dramatically over the last decade, and non-GAAP report-
3 R. G. Associates, Inc., Baltimore, Maryland, USA
ing is now commonplace in capital markets. This proliferation of non-
Correspondence GAAP reporting has renewed both regulators’ and standard setters’
Theodore E. Christensen, University of Georgia, interests in these alternative performance metrics. For example, the
J. M. Tull School of Accounting, A307 Moore-
Rooker Hall, Athens, Georgia, 30602, United
SEC, FASB, and IASB have all recently questioned what this increas-
States. ing reporting trend means for IFRS- and US-GAAP-based report-
Email: tedchris@uga.edu ing and whether these measures are misleading to investors. This
increasing focus on non-GAAP metrics motivates us to synthesize
the nearly two decades of research on non-GAAP reporting to pro-
vide insights on what academics have learned to date about this
reporting practice. Then, we utilize a novel dataset of detailed non-
GAAP disclosures to provide new descriptive evidence on current
trends in non-GAAP reporting and its recent proliferation. Finally,
we discuss important questions for future researchers to consider in
moving the literature forward.
KEYWORDS
non-GAAP earnings, regulation, standard setting
1 INTRODUCTION
Managers, financial analysts, investors, lenders, compensation committees, and other stakeholders often evaluate a
company's earnings performance using metrics other than GAAP-based net income. These stakeholders generally
start with GAAP earnings and back out (or exclude) earnings components that they deem to be transitory or non-
cash. They argue that these excluded items are less relevant for assessing firm performance and that the “non-GAAP”
performance number is more appropriate for their intended purposes. The growth in these non-GAAP metrics over
the past 20 years reflects a widespread acceptance of non-standard performance metrics as a way to evaluate firm
performance.
Although skeptics have frequently viewed non-GAAP disclosure as a threat to the traditional GAAP-based income
statement, regulators recognize that non-GAAP metrics can be informative to investors and have laid the groundwork
for firms to disclose these metrics in a transparent manner. Standard setters and regulators have recently renewed
J Bus Fin Acc. 2018;45:259–294. wileyonlinelibrary.com/journal/jbfa

c 2017 John Wiley & Sons Ltd 259
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260 BLACK ET AL .
their interest in non-GAAP reporting as these metrics have increased in popularity (Golden, 2017; Rapoport, 2016),
raising questions about what these metrics mean for GAAP-based earnings and whether they mislead investors. In
short, non-GAAP reporting has become commonplace in capital markets, and this increase in popularity has created
questions about the motives and implications of non-GAAP metrics. We assert that a review of the academic liter-
ature is necessary to provide insights on what we have learned after nearly two decades of research.1 In addition,
since the extant literature contains little descriptive evidence on what has changed in non-GAAP reporting during this
recent proliferation, we use a novel dataset of managers’ non-GAAP exclusions to provide new descriptive evidence on
how non-GAAP reporting has changed during this time period. Finally, we conclude by providing suggestions for future
researchers to consider for advancing the non-GAAP literature.
Our objective in providing this literature review is to aggregate evidence from the extant literature into one location
to inform academics, regulators, and investors about “what we know” after nearly two decades of research. We begin
by highlighting how non-GAAP reporting fits within the broader voluntary disclosure literature. We then discuss the
major questions this research has attempted to answer. The primary thrust of this discussion indicates that (1) investors
pay more attention to non-GAAP performance metrics than to standard GAAP earnings when looking for a summary
assessment of performance, (2) early on, less sophisticated investors were more likely than sophisticated investors
to rely on non-GAAP information, but more sophisticated stakeholders seem to be focusing on non-GAAP metrics in
recent years, (3) in calculating non-GAAP metrics, managers have frequently excluded “one-time” transactions over
time (e.g., a litigation settlement), but have become increasingly likely to exclude “recurring” items (e.g., stock-based
compensation), (4) both managers and analysts are primarily motivated to provide non-GAAP performance metrics to
inform stakeholders, but there is evidence of opportunism, particularly prior to Regulation G (Reg. G), (5) both man-
agers and analysts appear to influence non-GAAP earnings calculations, (6) despite concern about measurement error
in early studies, new data allows researchers to mitigate the effects of measurement error and to design cleaner anal-
yses, (7) regulation has generally resulted in higher quality non-GAAP disclosures, (8) several monitoring mechanisms,
such as independent boards, analysts, creditors, short sellers, and large blockholders appear to play a role in disciplin-
ing managers’ non-GAAP reporting practices, (9) a large body of research on countries outside of the US enhance our
understanding of non-GAAP disclosure and its use worldwide, and (10) large-scale data on non-GAAP disclosure is
becoming available from various sources.
Next, we provide a current picture of the non-GAAP reporting landscape. Most of the evidence in the extant liter-
ature relates to sample periods prior to 2007 (e.g., Bhattacharya, Black, Christensen, & Larson, 2003; Bhattacharya,
Black, Christensen, & Mergenthaler, 2004). Although a few more recent studies provide descriptive evidence on cur-
rent non-GAAP reporting practices (Bentley, Christensen, Gee, & Whipple, 2017; Black, Christensen, Ciesielski, &
Whipple, 2017b), there is little evidence on how non-GAAP calculations have changed during this recent prolifera-
tion, which limits how academics can inform parties interested in current reporting practices. Therefore, we provide a
timely view of how the current non-GAAP reporting environment is changing. To provide this insight, we use a novel
dataset that contains both the category and dollar value of non-GAAP adjustments for S&P 500 firms for years 2009
through 2014. We find that non-GAAP reporting frequency has increased across all sectors during our sample period,
indicating that all sectors are embracing this reporting practice. We also find that firms are excluding more items from
their non-GAAP calculations across time, excluding an average of 2.7 recurring and nonrecurring items in 2009 versus
3.1 items in 2014. Time trends also indicate that the magnitude of these exclusions has increased substantially over
our sample period, from $0.73 in 2009 to $1.03 in 2014. We also find that the increase in exclusion magnitude is due to
nonrecurring exclusions, which have nearly doubled in size over our sample period. Finally, we provide new descriptive
evidence on how frequently firms exclude particular items across time, and how much variation exists in the value of
these particular exclusions.
We conclude by highlighting several unexplored questions that should be examined to move the literature for-
ward. Examples of areas requiring further analyses include (1) the users of non-GAAP earnings, (2) the motives behind
1 Non-GAAP reporting studies focus on adjustments made to bottom-line EPS, net income, or even operating income. Our review of prior research is compre-
hensive and is intended to include all non-GAAP earnings figures that prior researchers have explored.
BLACK ET AL . 261
recurring adjustments and why they persist post Reg. G, (3) how multiple parties influence non-GAAP reporting prac-
tices, (4) what the proliferation of non-GAAP reporting means for regulators and standard setters, and (5) how cross-
country differences in accounting standards, regulation, and enforcement influence the disclosure and usefulness of
non-GAAP earnings.
2 REGULATORY, STANDARD SETTING, AND ACADEMIC FOUNDATIONS
2.1 Regulatory and standard setting influences on non-GAAP reporting

In the US, regulators and standard setters have consistently expressed interest in non-GAAP reporting (see Table 1
for a summary of the regulatory and standard setting timeline for non-GAAP reporting). In the late 1990s and early
2000s when non-GAAP reporting was less common, statements by regulators and standard setters were often cau-
tious and somewhat negative because non-GAAP numbers were unregulated and often opaque in nature (Dow Jones,
2001; Securities and Exchange Commission (SEC), 2001a, 2001b). For example, the SEC issued “cautionary advice”
to investors in December of 2001, alerting them to potential dangers of using non-GAAP information. When the
Sarbanes-Oxley Act (SOX) was enacted (on July 30, 2002), the US Congress included a specific provision, Section
401(b), on non-GAAP performance metrics directing the SEC to issue regulations to place limitations on non-GAAP
disclosure. To codify the congressional directive specified in SOX, the SEC implemented Regulation G in March of 2003
to regulate non-GAAP disclosure.2 The SEC further addressed common questions regarding how the regulation applies
to reporting practice through Compliance and Disclosure Interpretations (C&DIs) on non-GAAP reporting in January
of 20103 (updated in July of 2011) and in May of 2016 (updated in October of 2017).4 During this timeframe, Howard
Scheck, the SEC's former chief accountant of the Division of Enforcement, labeled non-GAAP performance measures
as a “fraud risk factor” (Leone, 2010). Soon thereafter, the SEC also formed a task force to closely examine potentially
misleading non-GAAP earnings metrics disclosed in public filings (Rapoport, 2013). More recently, Mary Jo White, the
former chair of the SEC, expressed concern about non-GAAP reporting and highlighted that this reporting practice
warrants close attention (Cohn, 2016; Teitelbaum, 2015). Following these statements, and the issuance of the 2016
C&DIs on non-GAAP reporting, the SEC encouraged companies to “self-correct” their reporting practices that are not
in compliance with non-GAAP reporting regulation. In addition, the SEC has subsequently issued many comments let-
ters to companies regarding non-GAAP metrics (Rapoport, 2016).
The SEC is not the only US party currently interested in non-GAAP reporting. Aside from the numerous articles
in the financial press on non-GAAP reporting (e.g., Lahart, 2016a, 2016b; Michaels & Rapoport, 2016; Teitelbaum,
2015), the FASB has expressed increased interest in (and concern about) the proliferation of non-GAAP reporting.
For example, some members of the FASB question whether the proliferation of non-GAAP performance metrics indi-
cates a need to better organize the income statement so that investors can more easily calculate their own customized
performance metrics (Linsmeier, 2016; Siegel, 2014). In fact, the FASB has recently added a project to its technical
agenda that considers whether more disaggregated disclosure of performance information is needed on the income
statement or through disclosure. FASB Chairman Russell Golden echoed similar sentiments when he stated that he
wondered whether firms using non-GAAP numbers are sending a signal about “ways to improve GAAP,” and highlights
that in considering potential improvements to GAAP reporting, “it is important to see how companies today use non-
GAAP reporting to communicate their performance to shareholders” (Golden, 2017). Golden (2017) also highlights,
2Along with the implementation of Reg. G, the SEC also imposed a new set of rules related to Reg. S-K (rule 10). Among other things, this modification to an
existing regulation requires that the GAAP number be disclosed at least as prominently as the non-GAAP number.
3 While the implementation of Reg. G was initially viewed as a deterrent to non-GAAP reporting, practitioners generally viewed the 2010 C&DIs as a “loosen-
ing” of the SEC's (perhaps overly stringent) attitude toward adjusted earnings metrics.
4 https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.
TA B L E 1 Non-GAAP regulatory and standard-setting timeline
262
Date Description Source

10/22/2001 Enron announces an SEC inquiry into its partnerships. https://www.washingtonpost.com/wp-dyn/articles/A25624-2002Jan10_5.html
12/4/2001 SEC issues “Cautionary Advice Regarding the Use of ‘Pro Forma’ Financial Information https://www.sec.gov/rules/other/33-8039.htm
in Earnings Releases.”
1/16/2002 SEC brings first pro forma reporting case against Trump Hotels & Casino Resorts Inc. https://www.sec.gov/news/headlines/trumphotels.htm
2/14/2002 Sarbanes-Oxley Act of 2002 introduced in the US House of Representatives. https://www.govtrack.us/congress/bills/107/hr3763/text/ih
7/30/2002 President Bush signs the Sarbanes-Oxley Act of 2002 into law. https://www.sec.gov/answers/about-lawsshtml.html#sox2002
3/28/2003 SEC Regulation G, “Conditions for Use of Non-GAAP Financial Measures” (and the new https://www.sec.gov/rules/final/33-8176.htm
Rule 10 of Regulation S-K) becomes effective.
6/13/2003 SEC Staff Members post “Frequently Asked Questions Regarding the Use of https://www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm
Non-GAAP Financial Measures.”
1/11/2010 SEC issues Compliance & Disclosure Interpretations on Non-GAAP Financial https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm
Measures, updated on January 15, 2010 and July 8, 2011.
9/29/2010 During a speech at the accounting-industry conference, Howard Scheck, Chief https://ww2.cfo.com/accounting-tax/2010/09/whats-on-the-secs-radar/
Accountant of the SEC's Division of Enforcement, named non-GAAP metrics a “fraud
risk factor.”
12/10/2013 SEC Financial Reporting and Audit Task Force chairman indicates that the SEC would https://www.wsj.com/articles/SB10001424052702303330204579250654
scrutinize non-GAAP measures that could be misleading because of “mislabeling” 209426392
measures.
3/31/2015 IASB Chairman Hans Hoogervorst delivers a speech, “Mind the Gap (Between http://archive.ifrs.org/Alerts/Conference/Documents/2015/Speech-Hans-
non-GAAP and GAAP)” in the context of the IASB's Disclosure Initiative Mind-the-Gap-speech-Korea-March-2015.pdf
(Hoogervorst, 2015).
10/11/2015 IASB Chairman Hans Hoogervorst participates in a panel discussion at the Accounting http://archive.ifrs.org/IFRS-Research/Events/Documents/Research
& Finance / IASB Research Forum and identifies non-GAAP reporting as an issue of %20Forum%202015/AF-IASB%20Research%20Forum%20Program
concern. %20Final.pdf
10/22/2015 FASB member Thomas Linsmeier indicates that the FASB is considering a new exposure https://www.terry.uga.edu/events/details/5507
draft on income statement presentation to separate recurring and non-recurring
income components.
12/9/2015 In her keynote address at the 2015 AICPA National Conference, SEC Chair, Mary Jo https://blogs.wsj.com/cfo/2015/12/09/non-gaap-numbers-may-confuse-
White said that non-GAAP measures may be a “source of confusion,” and that this investors-sec-chair/
area “deserves close attention.”
5/11/2016 IASB Chairman Hans Hoogervorst delivers a speech, “Performance reporting and the http://archive.ifrs.org/About-us/IASB/Members/Documents/Hans-Hoogervorst-
pitfalls of non-GAAP metrics” (Hoogervorst, 2015). EAA-Annual-Conference-11-May-2016.pdf
5/17/2016 SEC Division of Corporation Finance issues Compliance & Disclosure Interpretations https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm
of regulations on non-GAAP measures in question and answer format, updated
BLACK ET AL .
October 17, 2017
BLACK ET AL . 263
however, that non-GAAP metrics that are inconsistent with the FASB's motives for standards (e.g. consistent and cred-
ible information) will not be considered.5
Outside of the US, non-GAAP performance metrics are generally more widely accepted, and companies are afforded
significantly more latitude in where and how they present non-GAAP information. IFRS allows companies to report
non-GAAP performance metrics on the face of their income statements as long as the corresponding GAAP numbers
receive at least equal prominence with adjusted performance metrics and companies provide a reconciliation between
the two numbers (IAS 33; Young, 2014). In addition, Young (2014, p. 448) notes that “international securities regula-
tions do not typically place restrictions on non-GAAP disclosures presented in communications with investors,” and
that companies can “discuss non-GAAP earnings in unaudited report narratives without the need for accompanying
definitions, reconciliations or explanations.”
Nevertheless, the IASB has recently identified non-GAAP performance measures as a threat to the integrity of IFRS
financial reporting, indicating that regulators should do more to rein in the use of non-GAAP metrics (Hoogervorst,
2015; Shumsky, 2016). Although the IASB is “open to the idea of learning from the use of non-GAAP measures,” not-
ing that such metrics might indicate a “vacuum in IFRS” and a need to define more commonly used performance met-
rics, Chairman Hoogervorst points out that many companies report alternative performance measures that: (1) exceed
their IFRS counterparts; (2) are misleading; (3) exclude recurring expense items; and (4) are given undue prominence in
the financial statements at the expense of IFRS numbers (Hoogervorst, 2015, p. 5). Chairman Hoogervorst specifically
highlights that IFRS “tries to create comparability across economic sectors” (Hoogervorst, 2015, p. 4) and that more
“discipline” in the presentation of non-GAAP metrics would benefit investors (Hoogervorst, 2015, p. 5).6
2.2 Understanding the non-GAAP reporting literature

One of the challenges in summarizing a growing literature on non-GAAP reporting is the difficulty in allocating space to
each study. Our objective is to provide a comprehensive overview of prior research. We did not search particular jour-
nals to identify research. On the contrary, we have attempted to include every known research paper on the topic of
non-GAAP reporting, both published and at the working paper stage.7 Panel A of Figure 1 summarizes the source of the
papers included in our review. We note that the largest single source of papers included in our review is current working
papers. Moreover, Panel A also indicates which journals have published the most non-GAAP reporting papers to date.
Review of Accounting Studies currently has the largest number of published studies (15), but we note that this num-
ber includes conference papers as well as published discussions of those conference papers. We include conference
discussions, however, because they contribute to the literature by helping to distill important insights to guide future
research. We also note that five North American journals (The Accounting Review, Journal of Accounting and Economics,
Journal of Accounting Research, Review of Accounting Studies, and Contemporary Accounting Research) have published the
majority (54%) of all published non-GAAP reporting studies. However, some non-North American journals have pub-
lished significant quantities of non-GAAP research. For example, the Journal of Business Finance & Accounting has pub-
lished the highest number of studies outside of the US and Canada with a total of eight published studies to date.
This review would become quite lengthy if we were to provide a detailed discussion of all of the referenced papers.
Therefore, our intent is to identify the main questions that prior research has explored and to summarize how prior
studies inform readers on these questions. In order to concisely do so, we focus more on the seminal papers in each
area and mention the incremental contributions of other papers that examine similar questions. The difficulty lies in
5 Although not traditionally considered as part of the non-GAAP literature, XBRL allows financial statement users to extract data on very specific items.
Therefore, it could allow financial statement users to construct their own customized performance metrics. However, the SEC's XBRL rules and tagsets pertain
to 10-K and 10-Q filings and not necessarily the earnings press release, where non-GAAP earnings are traditionally found.
6 We note that we generally use the term “non-GAAP” to refer to adjustments to any earnings metric required by standard setters. Technically speaking, in
most parts of the world, companies have adopted International Financial Reporting Standards (IFRS), so the adjustments would be to IFRS income or EPS. We
do not specifically call these measures “non-IFRS.” Instead, we use the generic term “non-GAAP” to encompass all earnings metrics that adjust a mandated
earnings number under the set of standards that apply in the company's jurisdiction.
7 Although including working papers in our review results in a more comprehensive discussion of the literature, it also introduces a limitation into our review.
Since inferences drawn from working papers can change through the review process, our discussion of working papers represents a current snapshot of the
literature and might not necessarily represent the inferences drawn from future iterations of these working papers.
264 BLACK ET AL .
Panel A: Non-GAAP Papers by Journal

Papers
40
35
30
25
20
15
10
0
RAST
JBFA
A&F
JAAF
TAR
Other US
AOS
BAR
EAR
JAE
Abacus
JAR
CAR
ABR
Other Internaonal
Working Papers
North American Journals UK Journals Internaonal
Panel B: Non-GAAP Papers: Web of Science Citations

Citations
700
600
500
400
300
200
100
0
Working Papers
RAST
JAAF
EAR
A&F
TAR
JAR
Other US
AOS
JBFA
BAR
Abacus
JAE
CAR
ABR
Other Internaonal
North American Journals UK Journals Internaonal
FIGURE 1 Non-GAAP papers and citations
determining which studies have the greatest impact on the literature. In order to gain a sense of which studies have had
the most influence, we perform a citation analysis of each of these papers using Web of Science citation counts from
Google Scholar. Panel B of Figure 1 summarizes the citation counts of non-GAAP reporting papers in our reference
list by journal. In general, the highest aggregate citations of non-GAAP studies are found in journals that publish the
most research in this area, with Journal of Accounting and Economics garnering the most citations to date (611 citations).
BLACK ET AL . 265
Outside of North American journals, papers published in the Journal of Business Finance & Accounting have tallied the
most citations to date (118 citations).8,9
2.3 Understanding non-GAAP reporting in the broader voluntary disclosure literature

We are only aware of one theory paper that specifically addresses non-GAAP reporting (Hirshleifer & Teoh, 2003).
Other papers formalize our thinking about “core earnings” (or “maintainable earnings”) and “transitory earnings”
(Ohlson, 1999; Stark, 1997). These concepts are key to understanding non-GAAP earnings since most managers claim
that they exclude “transitory items” in order to report a performance metric that accurately captures their firms’ “core
earnings.”10 However, the broader disclosure theory literature has evolved over time. Generally, disclosure theories
attempt to explain why managers choose to voluntarily disclose information publicly (e.g., Diamond & Verrecchia, 1991;
Dye, 1985; Einhorn & Ziv, 2008; Jung & Kwon, 1988; Trueman, 1986; Verrecchia, 1983). Non-GAAP earnings are a
voluntary disclosure that allows managers to reveal their own performance metrics, derived from standard GAAP-
based measures. Prior theories have often distinguished between public and private information. Moreover, theoret-
ical research also explores the timeliness of earnings information. Generally, theories focus on managers’ attempts to
reduce information asymmetry by providing information to markets either publicly or privately.
Theory suggests that managers’ decision to provide non-GAAP performance metrics likely depends on tradeoffs
between the costs and benefits associated with this type of disclosure (e.g., Verrecchia, 1983). In reality, the costs and
benefits of disclosure are evaluated in an endogenous game between managers and users of financial reports. Both the
supply and demand of information disclosed by managers are affected by the signal-to-noise ratio of a given disclosure
signal (e.g., performance). If a signal is informative enough relative to its noise or variance, it is more likely to be dis-
closed and demanded by financial statement users for both valuation and contracting. When GAAP earnings become
sufficiently noisy, managers can use non-GAAP performance to provide a clearer signal of performance and alleviate
information asymmetry resulting from a noisy GAAP metric. For non-GAAP disclosure to be useful, however, it must be
credible and accurate. Otherwise, users of the financial information would simply discount or disregard the non-GAAP
disclosure. In addition, while some disclosure models focus on a one-period setting, non-GAAP reporting is part of a
multi-period disclosure policy. As a result, the users of financial statements will learn from prior firm actions, indicating
that managers who mislead stakeholders with aggressive non-GAAP disclosures will likely harm the firm's reputation in
the long run. Thus, non-GAAP disclosures should, on average, be motivated by incentives that align with financial state-
ment users if financial statement users learn and can identify aggressive non-GAAP reporting. Nevertheless, there may
be situations where the opaqueness of firm disclosures, investors' limited attention, or a manager's myopic focus moti-
vates firms to disclose misleading performance metrics to extract rents from financial statement users.
2.4 Non-GAAP reporting: What do we know after nearly two decades of academic
research?
We next summarize the extant literature to focus on the most common questions examined in prior non-GAAP stud-
ies. We note that this is not the first review of the non-GAAP literature. As part of their broader review of the
financial reporting environment, Beyer, Cohen, Lys, and Walther (2010) provide a short discussion of non-GAAP
8 We note that counting Web of Science citations is only one way of measuring citations or impact. We chose this method because it is a widely accepted
measure of an article's importance in a given literature.
9Based on Web of Science citations, the most influential papers in this area are as follows: (1) Bradshaw and Sloan (2002) (186 citations); (2) Doyle, Lund-
holm, and Soliman (2003) (117); (3) Bhattacharya et al. (2003) (110); (4) Frederickson and Miller (2004) (108); (5) Lougee and Marquardt (2004) (100); (6)
Bowen, Davis, and Matsumoto (2005) (95); (7) Gu and Chen (2004) (89); (8) Elliott (2006) (86); (9) Brown and Sivakumar (2003) (85); (10) Bhattacharya, Black,
Christensen, and Mergenthaler (2007) (54). We note that this ranking only includes papers focused solely on non-GAAP reporting, while Figure 1 includes any
papers that touch on non-GAAP reporting.
10 While our focus in this section centers on theoretical research, the notion of excluding transitory components to arrive at “core earnings” is related to a long
literature on earnings components (e.g., Lipe, 1986; Pope & Wang, 2005). While these studies are somewhat related, space constraints dictate that we focus
on research directly related to non-GAAP reporting.
266 BLACK ET AL .
reporting. Because they review such a broad topic, they are limited in how much they can discuss each of the sub-
literatures that comprise this larger topic. Young (2014) provides an informative overview of non-GAAP reporting in
general, including discussions of the reasons for this type of reporting and the challenges that this reporting presents.
In addition, he incorporates discussions of the academic literature with many valuable insights and informative refer-
ences to international evidence. More recently, Black (2016) provides a brief, yet insightful commentary on non-GAAP
reporting, while Marques (2017) provides an additional review of the non-GAAP reporting literature from an interna-
tional perspective. Our objective is to provide a comprehensive review focused specifically on the academic research
that examines non-GAAP reporting (both in US-based and international research). In doing so, we aggregate the nearly
two decades of academic work into one place to provide context on what we as academics have learned about non-
GAAP reporting. We group the literature into the most common questions examined in non-GAAP studies to inform
(1) academics attempting to understand the scope of the extant literature, and (2) regulators and practitioners inter-
ested in better understanding the practice of non-GAAP reporting. In addition, this summary of the literature provides
a backdrop for our subsequent discussions on current trends in non-GAAP reporting and directions for future research.
In discussing the extant literature, we note that non-GAAP earnings have also been labeled as “pro forma earnings”
and “street earnings.” We use the label “non-GAAP earnings” as an umbrella term to describe this type of reporting in a
more general sense, while we use “pro forma earnings” to refer to managers’ non-GAAP metrics and “street earnings”
to refer to non-GAAP metrics from forecast data providers (e.g., I/B/E/S, First Call).
2.4.1 Do investors pay attention to non-GAAP performance metrics?

The early research in this area explores whether investors rely on non-GAAP performance metrics or whether they
focus on GAAP earnings. Critics in the financial press from this time period expressed skepticism about the new phe-
nomenon of disclosing non-GAAP performance metrics to investors, arguing that these numbers were self-serving on
the part of managers and misleading to investors (e.g., Derby, 2001; Dreman, 2001; Elstein, 2001; Liesman & Weil,
2001a, 2001b). Moreover, regulators during this era were extremely troubled by the growing tendency toward non-
GAAP disclosure. For example, Lynn Turner, the former SEC Chief Accountant, claimed that non-GAAP earnings were
an opportunistic way for managers to report “everything but bad stuff” (Dow Jones, 2001). Graham, Harvey, and
Rajgopal (2005) survey managers and find evidence consistent with firms emphasizing non-GAAP metrics when they
have weak GAAP earnings.
Hirshleifer and Teoh (2003, pp. 337 and 339) model “firms’ choices between alternative means of presenting infor-
mation” and find that non-GAAP disclosures can bias investors’ assessments of future cash flows upward, yet they also
show that non-GAAP metrics can ensure that “stock prices more accurately reflect fundamental value.”11 Bradshaw
and Sloan (2002) provide the first large-sample empirical evidence on non-GAAP reporting in the US and find that
investors began to respond more to street earnings than to GAAP earnings after 1992. Moreover, Bhattacharya et al.
(2003) find that investors view manager-adjusted non-GAAP earnings to be more informative than GAAP operating
earnings. These studies form the foundation of the “horse race” literature, comparing investor reactions to GAAP ver-
sus non-GAAP numbers. Several other studies compare market reactions to non-GAAP performance metrics versus
other GAAP-based numbers and, consistent with these first studies, generally conclude that non-GAAP information
is relevant to investors—even in the more contemporary non-GAAP reporting environment (Bradshaw, Christensen,
Gee, & Whipple, 2017; Brown & Sivakumar, 2003; Johnson & Schwartz, 2005; Marques, 2006; Venter, Emanuel, &
Cahan, 2014; Wieland, Dawkins, & Dugan, 2013).12 Finally, experimental research also finds that non-GAAP metrics
can influence investors’ decisions, primarily through an unintentional cognitive effect that influences perceived firm
11 Lambert (2003) expresses concerns about some of the key assumption in Hirshleifer and Teoh's (2003) model and how the model applies to real-world
situations. Specifically, he questions the assumption that “the errors made by individuals do not ‘wash out’ in aggregate nor are they driven out by the behavior
of more sophisticated investors” (Lambert, 2003, p. 388).
12 Some researchers have offered alternative explanations for investors’ preference for non-GAAP relative to GAAP earnings, such as measurement error
(Bradshaw, 2003; Cohen, Hann, & Ogneva, 2007) or extreme exclusion values (Abarbanell & Lehavy, 2007). We discuss research related to several of these
concerns in subsequent sub-sections.
BLACK ET AL . 267
performance, as opposed to investors simply relying on the non-GAAP metric (Elliott, 2006; Frederickson & Miller,
2004).
2.4.2 Who uses non-GAAP information?

After exploring whether investors rely on non-GAAP disclosures, the next logical question is: which financial state-
ment users rely on non-GAAP information? In other words, the somewhat surprising result from early research that
investors rely more on non-GAAP earnings than GAAP earnings led researchers to question “which set of investors,”
and whether “other financial statement users,” react to the non-GAAP earnings numbers promoted by managers.
Experimental researchers are the first to explore some of these questions. Frederickson and Miller (2004) and Elliott
(2006) find that the existence of a non-GAAP number in the earnings press release, as well as the relative placement of
the non-GAAP and GAAP earnings figures within the press release, affect the judgments of less sophisticated investors.
Although less susceptible to the influence of non-GAAP reporting, experimental research also indicates that more
sophisticated parties can be influenced by non-GAAP reporting. For example, Elliott (2006) finds evidence that ana-
lysts view non-GAAP earnings to be more reliable when firms reconcile their non-GAAP metrics to GAAP-based earn-
ings, and Andersson and Hellman (2007) find that non-GAAP earnings can influence analysts’ earnings per share (EPS)
forecasts.
Archival studies have used trade-size-based proxies to distinguish the trading activities of less and more sophisti-
cated investors and generally find evidence that complements the inferences from experimental research. These stud-
ies find evidence consistent with less (but not more) sophisticated investors relying on non-GAAP information (Allee,
Bhattacharya, Black, & Christensen, 2007; Bhattacharya, Black, Christensen, & Mergenthaler, 2007). More recently,
Christensen, Drake, and Thornock (2014) find that short sellers, who are generally deemed to be informed traders,
trade as if non-GAAP earnings disclosures generate exploitable information advantages. Their results are consistent
with short sellers viewing non-GAAP earnings disclosures as a signal of lower reporting quality and future underperfor-
mance and trading to take advantage of potential information asymmetries arising from the disclosures.13 Consistent
with non-GAAP reporting informing financial statement users in different ways, Bradshaw, Plumlee, Whipple, and Yohn
(2016) provide evidence that non-GAAP earnings decrease analyst consensus about future performance, and that this
effect is due to different perceptions about forecasted expenses. Prior research has also explored analysts’ forecast
revisions surrounding non-GAAP disclosures (since they are generally viewed to be sophisticated financial statement
users) and find that they react to non-GAAP performance measures in revising their future earnings forecasts, but are
more skeptical than investors of potentially misleading earnings exclusions (Bhattacharya et al., 2003).
In addition to investors and analysts, other parties also use non-GAAP performance metrics. For example,
Curtis, Li, and Patrick (2017) find that the majority of earnings performance measures used by S&P 500 firms in CEO
annual bonus plans are adjusted earnings measures. Other researchers find evidence consistent with compensation
committees commonly identifying non-GAAP performance metrics for evaluating manager performance in determin-
ing executive compensation (Black, Black, Christensen, & Gee, 2017a; Guest, Kothari, & Pozen, 2017). Related studies
find a strong association between compensation incentives and managers’ propensity to disclose non-GAAP numbers
to external stakeholders (Bansal, Seetharaman, & Wang, 2013; Grey, Stathopoulos, & Walker, 2013; Isidro & Marques,
2013; Lont, Ranasinghe, & Roberts, 2017; Scheetz & Wall, 2014). Moreover, the quality of non-GAAP reporting in terms
of the persistence of non-GAAP exclusions appears to be better when compensation committees and managers use and
report non-GAAP earnings (Black et al., 2017a).
In addition, creditors often frame debt covenants based on customized non-GAAP performance metrics
(Christensen, Pei, Pierce, & Tan, 2017b; Dyreng, Vashishtha, & Weber, 2017). Christensen et al. (2017b) find that the
frequency of non-GAAP reporting drops off significantly following debt covenant violations. However, the quality of
exclusions of firms that continue to disclose non-GAAP performance metrics increases significantly, consistent with
the notion that managers are reluctant to disclose lower quality non-GAAP metrics when they are under scrutiny.
13 As a corollary, Bhattacharya, Christensen, Liao, and Ouyang (2017) find that managers react to the threat of short selling by providing less-frequent and
higher quality non-GAAP disclosures.
268 BLACK ET AL .
2.4.3 What adjustments are commonly used to calculate non-GAAP earnings?

Bradshaw and Sloan (2002) document empirical evidence that the difference between non-GAAP and GAAP earnings
grew throughout the late 1980s and 1990s and that this increasing difference is partially attributable to the exclusion
of special items (also known as one-time, transitory, or nonrecurring items). Several early studies hand collect non-
GAAP exclusions to provide evidence on the items that managers and analysts exclude in calculating non-GAAP per-
formance metrics. These studies find that in the late 1990s, companies often excluded one-time items (such as gains
and losses on asset disposals, merger and acquisition costs, and extraordinary items) in an effort to focus investors’
attention on sustainable earnings (Bhattacharya et al., 2003; 2004; Entwistle, Feltham, & Mbagwu, 2005, 2006; Lougee
& Marquardt, 2004; Nichols, Gray, & Street, 2005). While managers are often criticized for excluding one-time expense
items (resulting in a non-GAAP metric that exceeds GAAP earnings), empirical evidence indicates that some managers
also exclude one-time gains, which results in a lower non-GAAP performance metric (Baumker, Biggs, McVay, & Pierce,
2014; Bhattacharya et al., 2003; Curtis, McVay, & Whipple, 2014). For example, Curtis et al. (2014) find that approx-
imately one-half of firms with one-time gains report non-GAAP earnings in a manner that easily allows investors to
assess operating performance without the gain. However, they also find that some managers are inconsistent in their
exclusion choices. For example, these managers exclude income decreasing items in quarters where they exist, but
do not to exclude income increasing items in other quarters. Donelson, Koutney, and Mills (2017) find similar evi-
dence regarding managers’ inconsistent behavior in excluding income-increasing transitory tax items. Evidence on
the current non-GAAP reporting environment indicates that nonrecurring items are the most common form of non-
GAAP adjustments, and that these adjustments most frequently relate to restructuring charges, tax resolutions, and
acquisition-related charges (Black et al., 2017b).
In some cases, however, managers and analysts do not simply exclude one-time items from their non-GAAP cal-
culations, but also remove recurring transactions (also known as “other exclusions” in the extant literature) that they
claim are “non-operating” or “non-cash” in nature. Bradshaw and Sloan (2002) document that the exclusion of amor-
tization also contributes to the growing rift between GAAP and non-GAAP earnings, while Bhattacharya et al. (2003)
provide descriptive evidence that the frequency of depreciation, amortization, and stock compensation exclusions dra-
matically increased in 2000, as compared to 1998 and 1999. Doyle et al. (2003) find that firms with non-GAAP metrics
exclude an average of two cents per share of expenses related to recurring items. Black and Christensen (2009), Black
et al. (2017b), and Whipple (2016) look beyond Bhattacharya et al. (2003)’s sample period and find that recurring item
transactions remain a common non-GAAP adjustment, and that these adjustments primarily relate to stock compen-
sation, amortization, and investment gains and losses. It appears that excluding recurring items has become more com-
mon than in earlier non-GAAP reporting periods. Changes in accounting standards, such as SFAS 123R (Barth, Gow, &
Taylor, 2012), likely contribute to the increase in recurring item exclusions since these standards mandated the
inclusion of these items in GAAP-based numbers.14
2.4.4 What motivates managers and analysts to provide non-GAAP performance metrics?
As non-GAAP reporting became popular in the 1990s, regulators, the financial press, and researchers were often
cautious about non-GAAP performance metrics because these measures deviated from the prescribed “standard”
earnings number. As a result, non-GAAP research has largely focused on better understanding the motives for non-
GAAP reporting. Early evidence from non-GAAP studies indicates that non-GAAP earnings are typically more per-
sistent than GAAP earnings (Bhattacharya et al., 2003) and more useful for valuation purposes (Bradshaw & Sloan,
2002; Brown & Sivakumar, 2003; Frankel & Roychowdhury, 2005). This evidence is consistent with non-GAAP earn-
ings being motivated by an incentive to better inform financial statement users about “core operations.” Bradshaw and
Sloan (2002), however, also note that since non-GAAP exclusions frequently relate to expenses, non-GAAP reporting
might actually represent an attempt by managers and analysts to report higher performance metrics to garner higher
14 SFAS 123R requires firms to expense stock-based compensation, which some would argue is defensible (Christensen, 2012).
BLACK ET AL . 269
valuations. Researchers frequently focus on these two incentives, informativeness versus opportunism, when investigat-
ing motives for non-GAAP reporting.
Numerous studies find evidence suggesting that providing informative or value-relevant earnings information for
stakeholders is a significant motivation for managers to report non-GAAP earnings metrics (e.g., Black et al., 2017b;
Entwistle et al., 2005; Kyung, Lee, & Ng, 2016b). For example, (1) managers can systematically exclude one-time items
in calculating non-GAAP earnings to provide a more accurate depiction of core performance (Bhattacharya et al.,
2003; Curtis et al., 2014; Lougee & Marquardt, 2004); (2) investors respond more to non-GAAP than to GAAP met-
rics, suggesting greater reliance on non-GAAP information than on GAAP information (e.g., Bhattacharya et al., 2003;
Bradshaw & Sloan, 2002); and (3) researchers have found evidence suggesting that investors are not mislead by non-
GAAP reporting (Johnson & Schwartz, 2005), particularly in the post-Reg. G time period (Chen, 2010; Huang & Skantz,
2016; Jennings & Marques, 2011; Whipple, 2016; Zhang & Zheng, 2011). More recently, Black et al. (2017b) examine
the comparability and consistency of firms’ non-GAAP reporting, as regulators and academics have long argued that
non-GAAP reporting likely violates these basic tenets of GAAP earnings.15 They conclude that, on average, managers
vary their non-GAAP calculations over time and from other firms for informative reasons. In addition, they find that
managers have expertise in determining the persistence of earnings components and use this insight to inform their
exclusion choices. Thus, many studies conclude that managers are generally motivated by more altruistic incentives in
non-GAAP reporting.
Despite evidence that non-GAAP metrics generally seem to be motivated by an incentive to inform, prior research
finds numerous examples of potentially misleading non-GAAP disclosures. For example, several studies argue that,
while the exclusion of one-time items creates a performance metric that better reflects sustainable performance, the
exclusion of recurring items seems less justifiable (Barth et al., 2012; Bhattacharya et al., 2003; Black & Christensen,
2009). Using this same logic, several studies evaluate the “quality” of non-GAAP exclusions based on the extent to
which exclusions are associated with future operating performance (e.g., Bentley et al., 2017; Black et al., 2017b; Doyle
et al., 2003; Kolev, Marquardt, & McVay, 2008; Landsman, Miller, & Yeh, 2007), finding that recurring items exclusions
are the lowest quality non-GAAP adjustments and that these adjustments can mislead investors. Moreover, a large
number of studies focus on whether non-GAAP exclusions allow a firm to move from a position of missing a strategic
earnings target based on GAAP earnings to meeting the target based on non-GAAP earnings. These studies infer that
the motivation for the exclusions is to mislead investors by convincing them that an “artificial” performance measure
meets a desired outcome (Bhattacharya et al., 2003; Black & Christensen, 2009; Bradshaw et al., 2017; Brockbank,
2017; Doyle, Jennings, & Soliman, 2013; Graham et al., 2005; Isidro & Marques, 2015; Lopez, McCoy, Taylor, & Young,
2016; Marques, 2010; McVay, 2006; Wang, 2014).16
While managers are often scrutinized for providing adjusted earnings metrics that depart from GAAP, analysts are
generally believed to be more informative in their exclusion choices. Consistent with this notion, analysts focus on sus-
tainable earnings and are less likely to have a motive of misleading investors than are managers. Brown, Call, Clement,
and Sharp (2015) survey analysts and find that they generally exclude one-time items from their earnings forecasts.17
In addition, Gu and Chen (2004) find that analysts use their expertise in deciding which nonrecurring items to exclude in
order to provide a more informative measure for valuation (see also Chen, 2010). Heflin, Hsu, and Jin (2015) find that
analysts’ non-GAAP adjustments are informative because they reduce the conditional conservatism found in GAAP-
based earnings (see also Sobngwi, 2011), and Bentley et al. (2017) directly compare managers’ and analysts’ exclusions
15 Grant and Parker (2001) criticize the fact that many firms make different adjustments in calculating non-GAAP earnings each period, reducing the compa-
rability of their earnings over time. They conclude that academic research does not provide conclusive evidence of whether this ad hoc form of disclosure is
informative.
16 In contrast to prior studies examining the use of non-GAAP exclusions to meet the profit threshold, Leung and Veenman (2016) find that loss firms that
disclose non-GAAP earnings are actually very different from other loss firms. They find evidence suggesting that loss firms that use non-GAAP disclosures to
convert a GAAP loss to a non-GAAP profit actually signal higher future operating performance by excluding earnings components that are truly irrelevant in
predicting future performance.
17 Interestingly, different kinds of analysts have non-overlapping incentives for excluding earnings components. Batta and Muslu (2017) find that credit rating
agency and equity analysts make different adjustments that reflect their clienteles, with debt rating analysts making lower (more conservative) adjustments
than equity analysts.
270 BLACK ET AL .
and find that analysts’ exclusions are of higher quality. Baik, Farber, and Petroni (2009), however, find that uninfor-
mative incentives can also influence analysts’ exclusions by examining a situation where analysts might report higher
non-GAAP metrics to curry favor with managers.
Other examples of aggressive behavior on the part of managers and analysts include (1) the strategic emphasis of
non-GAAP earnings relative to GAAP earnings (Bowen et al., 2005; Elliott, 2006; Guillamon-Saorin, Osma, & Jones,
2012), (2) the strategic timing of earnings announcements containing non-GAAP information (Brown, Christensen,
& Elliott, 2012a), (3) the disclosure of non-GAAP information in response to general investor sentiment (Brown,
Christensen, Elliott, & Mergenthaler, 2012b), (4) the failure to consistently exclude one-time items (Baik et al., 2009;
Curtis et al., 2014; Hsu & Kross, 2011), and (5) the use of non-GAAP exclusions to influence IPO pricing (Brown,
Christensen, Menini, & Steffen, 2017).18 Moreover, non-GAAP disclosures can also be used as part of an overall per-
ception management strategy in conjunction with earnings management (Guillamon-Saorin, Isidro, & Marques, 2017).
Specifically, non-GAAP disclosures can substitute for different forms of earnings management and are often used as
a last resort after other perception management techniques (Black, Christensen, Joo, & Schmardebeck, 2017c; Doyle
et al., 2013; Lee & Chu, 2016; Guggenmos, Rennekamp, & Rupar, 2017). Finally, Kyung, Lee, and Marquardt (2016a)
find that while clawback provisions generally lead to higher quality earnings, they also increase managers’ propensity
to disclose non-GAAP metrics that exclude income items. Thus, non-GAAP reporting becomes more aggressive after
clawback adoption.
2.4.5 What roles do managers and analysts play in determining non-GAAP earnings?
Researchers have frequently questioned the extent to which non-GAAP earnings are a manager-driven versus analyst-
driven phenomenon (e.g., Bradshaw & Soliman, 2007; Lambert, 2004). For example, some managers claim that they
provide this information because analysts prefer these modified earnings metrics for forecasting and valuation, while
other managers highlight that they use these metrics for internal decision making. On the other hand, some analysts
state that they use non-GAAP metrics because managers focus on them, while other analysts argue that managers’
reporting choices have little influence on their exclusion decisions, but instead their exclusion decisions depend on
the properties of the earnings components (Brown et al., 2015; Heltzer, Mindak, & McEnroe, 2014). Bradshaw and
Sloan (2002) are the first to provide evidence on this question and conclude that managers’ reporting strategies play
a significant role in the increased focus on non-GAAP metrics during their sample period. Several other early studies
provide evidence indicating that managers and analysts both play a role in non-GAAP reporting, as proxies for manager
and analyst non-GAAP metrics differ approximately one-third of the time (Bhattacharya et al., 2003), and investors
appear to respond differently to manager- or analyst-specific adjustments (e.g., Bhattacharya et al., 2007; Black, Black,
Christensen, & Heninger, 2012; Brown et al., 2012a; Marques, 2006).
Bradshaw and Soliman (2007) highlight the lack of compelling evidence regarding who is responsible for non-GAAP
reporting as hindering researchers interested in examining the motives of non-GAAP reporting. Christensen, Merkley,
Tucker, and Venkataraman (2011) shed some light on this question by examining whether managers’ earnings forecasts
influence analysts’ non-GAAP earnings calculations, finding that managers’ forecasts influence analysts’ one-time
and recurring item exclusions.19 Their results, however, are indirect in nature (Bradshaw, 2011). Black, Christensen,
Kiosse, and Steffen (2017d) explore the extent to which interactions between managers and analysts in earnings
conference calls influence analysts’ non-GAAP earnings. The results suggest that managers can influence analysts’
18 Chen (2015) explores a related, but different question. Specifically, he examines the pricing impact of “as if” reported earnings disclosed in the IPO prospec-
tus. Most prospectuses provide “as if” or “pro forma” financials as the IPO itself will lead to material events such as the use of proceeds to repurchase bonds,
invest in new business lines, etc. Thus, firms will disclose to investors what net income and the balance sheet would look like after the material event. This “as
if” information is forward-looking, whereas Brown et al. (2017) examine the pricing impact of historical earnings information that has been adjusted for certain
line items. We thank Nerissa Brown for this clarifying explanation.
19 Donelson et al. (2017) find that analysts often rely on managers’ exclusion choices to guide them in deciding whether or not to exclude tax items. Their evi-
dence suggests that when managers fail to exclude transitory income-increasing tax items, analysts often follow suit. They attribute this behavior to analysts’
inattention, but it could also reflect analysts’ lack of technical tax knowledge.
BLACK ET AL . 271
exclusions through the narrative portion of the conference call. However, when analysts question managers’
recommended exclusions during the Q&A portion of the call, they are less likely to follow managers’ suggestions.
More recently, Bentley et al. (2017) perform a comprehensive investigation comparing managers’ and analysts’ non-
GAAP earnings by creating a large-scale dataset of managers’ non-GAAP disclosures (pro forma earnings) to compare
to I/B/E/S-provided non-GAAP numbers (street earnings). Overall, they find that the majority of non-GAAP metrics
relate to instances where both managers and analysts report the same metric, although managers and analysts can
report different metrics or independently report non-GAAP metrics while the other party focuses on GAAP earnings.
They also find that differences between managers’ and analysts’ reporting practices are systematic and are more likely
to occur for certain types of firm events or types of exclusions. In addition, when only analysts report a non-GAAP
metric, managers appear to inform analysts adjustments through implicit forms of disclosure, where they discuss items
that analysts exclude, but do not explicitly report a non-GAAP metric.
2.4.6 Does measurement error cast doubt on prior evidence?

Many of the early studies in the non-GAAP literature investigate the usefulness of GAAP versus non-GAAP earnings by
examining whether GAAP or non-GAAP earnings surprises garner a higher investor response (e.g., Bhattacharya et al.,
2003; Bradshaw & Sloan, 2002). Prior studies, however, did not have an explicit GAAP earnings forecast when calculat-
ing the GAAP earnings surprise, resulting in researchers frequently using the non-GAAP forecast as the GAAP expec-
tation. Thus, the GAAP earnings surprise is disproportionately measured with error, biasing estimates of the associ-
ation between GAAP earnings surprises and returns toward zero, and biasing prior studies toward finding evidence
that investors prefer non-GAAP earnings. Numerous discussants of these papers emphasize the adverse effects of this
form of measurement error and caution against relying on prior inferences that are subject to this error (e.g., Berger,
2005; Bradshaw, 2003; Christensen, 2007b). Cohen et al. (2007) use a reverse regression methodology in an attempt
to estimate how measurement error influences prior inferences and conclude that this form of error significantly con-
taminates analyses on investor response to GAAP versus non-GAAP earnings. However, similar to prior studies, they
do not have access to GAAP forecasts. As a result, some conference discussants (e.g., Christensen, 2007a and Berger,
2005) note that we do not yet fully understand how the measurement error problem influences prior inferences. Sim-
ilarly, Beyer et al. (2010) highlight that measurement error is one reason why it is still unclear whether investors are
better informed by non-GAAP metrics.20
Recently, Bradshaw et al. (2017) provide a comprehensive discussion of, and a solution to, the pervasive mea-
surement error problem discussed at length in the early non-GAAP literature. They utilize newly available analysts’
GAAP forecasts (first utilized to mitigate this form of error by Whipple, 2016), to examine how measurement error
in earnings expectations influences investors’ preferences for different earnings metrics. Consistent with the con-
cern in prior studies, they find that the GAAP earnings surprise, calculated in the traditional way, is comprised of 37%
measurement error, on average. Nevertheless, they find that the impact of this measurement error on pricing tests is
relatively small, and that investors prefer non-GAAP to GAAP earnings as a summary measure of performance, even
after correcting for measurement error. In addition, Bradshaw et al. (2017) highlight how this same measurement error
has plagued prior studies interested in how benchmark-beating incentives motivate non-GAAP reporting.21 Specif-
ically, they provide evidence that a significant portion of firms that were previously identified as using non-GAAP
reporting for benchmark-beating purposes were misidentified because of measurement error. They then illustrate how
this misidentification biases against (toward) finding evidence that firms exclude special (recurring) items for bench-
mark beating purposes.
20 Another form of measurement error discussed in the extant literature relates to I/B/E/S using a different definition of earnings across their actual and fore-
casted earnings metrics prior to 1992. In particular, prior to 1992, I/B/E/S did not always adjust their actual earnings metric to be on the same basis as analysts’
forecasts, which is problematic when analysts exclude items from their earnings forecasts. This inconsistency results in comparing actual earnings measures
that are on different bases than analysts’ forecasts. See Abarbanell and Lehavy (2007), Bradshaw and Sloan (2002), Cohen et al. (2007), and Christensen
(2007a) for examples of papers that discuss this definitional change and examine how it affects empirical inferences.
21 See Doyle et al. (2013) and Heflin and Hsu (2008) for other studies that also highlight concerns related to this form of error in benchmark-beating analyses.
272 BLACK ET AL .
2.4.7 How has regulation influenced non-GAAP reporting?

A large body of research explores how Reg. G, the only US regulation specifically targeted at non-GAAP reporting,
influences the quality of non-GAAP metrics.22 Several studies initially find a decrease in the frequency of non-GAAP
reporting immediately after the regulation (Entwistle et al., 2006; Heflin & Hsu, 2008; Marques, 2006; Nichols et al.,
2005). This reporting practice, however, rebounded shortly after the regulation and has consistently grown since that
time (Bentley et al., 2017; Black et al., 2012).23 Consistent with the intent of Reg. G, studies generally find that the
quality of non-GAAP disclosures increased subsequent to Reg. G (Black, Christensen, Kiosse, & Steffen, 2017e; Chen,
2010; Entwistle et al., 2006; Heflin & Hsu, 2008; Kolev et al., 2008; Wang, 2014). For example, Kolev et al. (2008) find
that exclusions are more transitory in nature after Reg. G, and that the firms with the lowest quality exclusions in the
pre-Reg. G period stopped reporting non-GAAP earnings after the regulation. They also find, however, that the quality
of one-time adjustments is lower after Reg. G, indicating that the regulation may have had an unintended consequence
as managers adapt to the new regulatory environment. Bowen et al. (2005) find that firms began reporting their non-
GAAP performance metrics less prominently after regulatory scrutiny.
In accordance with an increase in the quality of non-GAAP disclosures, several recent studies find that investors
appear to react more to non-GAAP earnings relative to GAAP earnings in the post-Reg. G environment (Black et al.,
2012; Marques, 2006). These studies also conclude that Reg. G's reconciliation requirement reduced the extent of
investor mispricing relative to the pre-Reg. G period, particularly for firms that improved the transparency of their
non-GAAP disclosures (Zhang & Zheng, 2011), and that investors are less likely to be misled (Jennings & Marques,
2011). Whipple (2016) finds that even though recurring item exclusions remain a common adjustment after Reg. G,
the quality of these exclusions has increased over time (becoming more non-cash in nature), and these adjustments
no longer mislead investors. More recent studies have found that in addition to Reg. G, the SEC's C&DIs have also sig-
nificantly influenced non-GAAP disclosure (e.g., Bond, Czernkowski, Lee, & Loyeung, 2017; Kyung & Weintrop, 2016).
Finally, SEC comment letters significantly increase the quality of non-GAAP disclosure (Chen, Lee, & Lo, 2017), yet
some SEC restrictions imposed by comment letters decrease the useful information available to investors (Gomez,
Heflin, & Wang, 2017).24
In addition to regulation in the US, prior research has examined how differences in legal and regulatory regimes
influence non-GAAP reporting in other countries. For example, Isidro and Marques (2015) explore how systematic
differences in institutional and economic factors across different countries in Europe influence the aggressiveness of
non-GAAP reporting in these countries. Specifically, they find that in countries where there is more pressure for man-
agers to focus on benchmarks and where earnings management is more difficult, managers are more likely to employ
non-GAAP exclusions to meet or beat those earnings targets. Early work in the UK also explores how changes in the
regulatory environment (i.e., a new accounting standard, FRS3) influence managers’ non-GAAP reporting (Lin &
Walker, 2000; Walker & Louvari, 2003).
2.4.8 How do other monitoring or disciplining mechanisms influence non-GAAP disclosure?

Although regulation appears to have a significant influence on non-GAAP disclosure, prior research has also exam-
ined other mechanisms that can influence non-GAAP reporting. Strong corporate governance is one example. Frankel,
McVay, and Soliman (2011) find that board independence is positively associated with the quality of non-GAAP earn-
ings, while Isidro and Marques (2013) find that a strong board of directors can decrease aggressive non-GAAP report-
ing. Analysts represent another monitor of non-GAAP reporting. Bentley et al. (2017) find that non-GAAP metrics are
of higher quality when both managers and analysts report the same non-GAAP metric, as compared to when managers
22 As explained previously, rule 10 of Regulation S-K (implemented at the same time as Reg. G) also addresses the topic of non-GAAP reporting.
23 Isidro
and Marques (2015) provide evidence suggesting that non-GAAP reporting is more prevalent in Europe than in the US based on their sample of
European firms from 2003 to 2005.
24 In contrast to most regulation-related studies, which focus on Reg. G in the US, Venter et al. (2014) investigate non-GAAP disclosure in South Africa where
it is mandatory for firms to report both GAAP and non-GAAP performance metrics. They find that non-GAAP earnings are more value-relevant than GAAP
earnings.
BLACK ET AL . 273
report non-GAAP earnings on their own. In addition, Christensen, Gomez, Ma, and Pan (2017a) find that higher ana-
lyst following is associated with a lower frequency of non-GAAP disclosure of the firms they follow. However, when
managers report non-GAAP earnings, the quality of their exclusions is higher (and the aggressiveness of their report-
ing is lower) when analyst following is higher. Creditors and large block shareholders can also serve monitoring roles.
Christensen et al. (2017b) find that the quality of non-GAAP reporting improves following a debt covenant violation,
presumably because both creditors and shareholders take on a stronger monitoring role.25 Further, compensation
committee use of non-GAAP reporting for performance evaluation can enhance the quality of non-GAAP earnings
metrics reported to investors (Black et al., 2017a). Moreover, auditors act as an important source of monitoring (Chen,
Krishnan, & Pevzner, 2012).
Finally, litigation risk can also serve as a form of monitoring (or disciplining) mechanism. Several studies find the
threat of litigation influences mangers’ non-GAAP reporting choices (e.g., Bentley et al., 2017). Specifically, Cazier,
Christensen, Merkley, and Treu (2017) use a quasi-natural-experimental setting in which US federal appeals court rul-
ings result in significant changes in litigation risk and employ a difference-in-differences design to explore how these
circuit-specific shocks influence firms’ propensity to provide a non-GAAP performance metric. They find that firms
increase (decrease) their non-GAAP reporting activity when litigation risk decreases (increases).
2.4.9 How does non-GAAP reporting differ outside of the US?

While a large majority of the research on non-GAAP reporting has been spurred on by regulatory scrutiny and the
financial press in the US, some of the early work in this area took place in the UK. For example, Lin and Walker (2000)
compare the value relevance of GAAP earnings following the release of a new reporting standard and an alterna-
tive “non-GAAP” earnings measure. They find that when a new standard for calculating GAAP earnings is imposed,
firms turn to customized metrics. Similarly, Walker and Louvari (2003) examine firms’ motivations for disclosing non-
GAAP performance metrics and their propensity to do so in order to convert a GAAP loss to a non-GAAP profit. Choi,
Lin, Walker, and Young (2007) explore differences between exclusions made by managers and I/B/E/S to investigate
widespread claims of managerial opportunism. While they do find some evidence of aggressive behavior with respect
to the exclusion of gains, their average results suggest that managers generally exclude one-time items to present a
better measure of core earnings. Similarly, Choi and Young (2015) explore managers’ exclusion of transitory items in
settings where managers’ motives may differ. Although their average results indicate that managers are primarily moti-
vated to disclose non-GAAP metrics to inform investors, they conclude that context-specific analyses are appropri-
ate since there are examples of situations where managers make more aggressive exclusions. More recently, Hallman,
Schmidt, and Thompson (2017) explore the influence of non-GAAP reporting in the UK on audit judgments and find
that non-GAAP disclosures lead auditors to make less conservative materiality judgments, which they argue can result
in lower-quality audits.
Young (2014) emphasizes that researchers have explored non-GAAP reporting in several other country-specific
settings such as France (Aubert, 2010), Germany (Hitz, 2010), South Africa (Venter et al., 2014), Australia (Cameron,
Percy, & Stevenson-Clarke, 2012; Malone, Tarca, & Wee, 2016), and New Zealand (Rainsbury, Hart, & Malthus, 2012).
For example, Crowley, Lont, and Scott (2017) explore the adoption of IFRS in New Zealand and find an unintended con-
sequence of the change in accounting standards. In particular, they find a significant increase in non-GAAP reporting
and conclude that companies adopting more stringent standards are more likely to report non-GAAP metrics.
In recent years, researchers have attempted to perform cross-sectional analyses examining non-GAAP reporting
across a large cross-section of firms from various countries. Isidro and Marques hand collect non-GAAP disclosures
from a large sample of firms listed among the Financial Times list of the largest 500 firms in Europe (across approxi-
mately 20 countries). They first explore how director compensation contracts based on market performance metrics
influence managers’ likelihood of reporting non-GAAP earnings externally in earnings press releases (Isidro & Marques,
2013). They find that higher reporting frequency is also associated with more aggressive exclusions, but that strong
25 Other kinds of monitoring can also influence managers’ non-GAAP disclosure. For example, customized industry disclosure standards can restrict firms’
ability to provide customized non-GAAP information (Baik, Billings, & Morton, 2008).
274 BLACK ET AL .
corporate governance restrains this behavior. Next, they examine how country-specific economic and institutional fac-
tors influence non-GAAP reporting (Isidro & Marques, 2015). They find that these institutional and economic factors
affect the use of non-GAAP exclusions to meet strategic earnings benchmarks. Finally, Guillamon-Saorin et al. (2017)
develop a measure of the extent to which firms employ “impression management” techniques to influence stakehold-
ers. They find that while non-GAAP earnings are informative to investors, companies that attempt to manage stake-
holder perceptions tend to have lower-quality exclusions, and investors discount these firms’ non-GAAP performance
metrics.
Many of the conclusions drawn from non-GAAP reporting studies in various countries around the world are simi-
lar to those based on samples of US-domiciled firms (e.g., Choi & Young, 2015). Some of this evidence is unique (e.g.,
Choi et al., 2007) or precedes similar work in the US (e.g., Lin & Walker, 2000) and some analyses in various settings
around the world replicate similar analyses previously documented in the US (Aubert, 2010). Nevertheless, the collec-
tive evidence from studies examining non-GAAP reporting in various settings adds richness to the literature that is not
available through examining a single market.
2.4.10 Sources of non-GAAP data

One of the most important questions facing researchers in this area is the source of data used to examine non-
GAAP reporting. As discussed previously, non-GAAP performance metrics may be calculated by various stakehold-
ers (managers, sell-side analysts, creditors, credit-rating analysts, compensation committees, etc.). Much of the reg-
ulatory concern and coverage in the financial press centers on the potential use of managers’ non-GAAP disclosures
to mislead stakeholders. Hence, managers are the focus of most studies. Nevertheless, it has historically been diffi-
cult to observe managers’ non-GAAP disclosures since they have not traditionally been collected by data providers.
The first large-scale investigation of non-GAAP performance metrics (Bradshaw & Sloan, 2002) uses I/B/E/S data to
examine the proliferation of non-GAAP reporting during the 1990s. Several subsequent studies use this I/B/E/S data
as a proxy for manager-disclosed performance metrics. These studies justify this proxy by noting the sizable over-
lap between I/B/E/S- and manager-reported non-GAAP metrics and the fact that analysts likely get their informa-
tion from managers (e.g., Doyle et al., 2003; Heflin & Hsu, 2008; Kolev et al., 2008).26 Several other studies hand-
collect relatively small samples of manager-disclosed non-GAAP earnings numbers from earnings press releases (e.g.,
Bhattacharya et al., 2003, 2004; Johnson & Schwartz, 2005; Lee & Chu, 2016; Leung & Veenman, 2016; Lougee &
Marquardt, 2004; Wang, 2014) and argue that, although there is significant overlap between the performance met-
rics disclosed by managers and those provided by forecast data providers, performance metrics provided by these
two parties differ for a non-trivial proportion of observations (approximately 33%). Nevertheless, while studies using
hand-collected data can more precisely focus on managers’ incentives using managers’ reported numbers, their sam-
ple sizes are limited due to the cost of hand-collection. Most recently, Bentley et al. (2017) empirically examine the
effects of using I/B/E/S to proxy for managers’ non-GAAP earnings and conclude that “I/B/E/S is a reasonable proxy
for identifying managers' higher quality non-GAAP metrics, while it systematically omits managers' lower quality
metrics.”
Recent advances in computing capabilities have allowed researchers to identify managers’ non-GAAP performance
metrics based on textual analysis (e.g., Bentley et al., 2017; Black et al., 2017a; 2017d; Lopez et al., 2016). While locating
non-GAAP disclosures using textual analysis is a worthy goal, we are not aware of any paper that has successfully done
so using only textual analysis. Instead, textual analysis is often used to limit the text to be examined through hand-
collection. Bentley et al. (2017) are able to identify the sentences that likely contain managers’ non-GAAP earnings
using textual analysis, but still require substantial hand collection to extract the non-GAAP metric from the identified
sentences. Since the Bentley et al. (2017) sample is large and identifies both GAAP and non-GAAP reporting firms
with at least 95% accuracy, they plan to make their data publicly available in the near future, which will provide the
first large-scale dataset of managers’ non-GAAP earnings and reduce the need to use I/B/E/S to proxy for managers’
26 Brown and Larocque (2013) document that the I/B/E/S “actual” earnings numbers do not necessarily represent the earnings metrics derived by all individual
analysts following the firm.

BLACK ET AL . 275
reporting. In addition, this data allows researchers to examine non-GAAP reporting in a more comprehensive setting
that contains both managers’ and analysts’ reporting choices. Black et al. (2017a) programmatically search both earn-
ings announcements and proxy statements. They extract text before and after a non-GAAP key word and then use
Amazon MTurk to invite potential workers to do the coding (also see Brockbank, 2017). The use of MTurk workers
seems to be gaining momentum. Finally, other providers are beginning to collect non-GAAP performance measures.
For example, Audit Analytics is now in the process of collecting this data. Finally, analysts have constructed datasets
related to non-GAAP reporting (e.g., this paper and Black et al., 2017b) and ISS Incentive Lab contains data on perfor-
mance metrics used in executive compensation contracts.27
3 SAMPLE SELECTION AND DESCRIPTIVE EVIDENCE
Numerous studies in the extant literature provide descriptive evidence on non-GAAP reporting (e.g., Bhattacharya
et al., 2003, 2004). Typically, these studies are based on data acquired through hand collection and relate to sample
periods ending prior to 2007. The non-GAAP reporting environment, however, has changed significantly since that
time. For example, Bentley et al. (2017) find that managers’ reporting of non-GAAP metrics has increased by 85.9%
since that time period, from 26.3% of their sample in 2007 to 48.9% in 2013. As a result, researchers, standard setters,
and regulators interested in current trends in non-GAAP reporting need new evidence related to the current report-
ing environment. Studies have recently begun to provide this evidence, highlighting the growing trend in non-GAAP
reporting, differences in managers’ and analysts’ non-GAAP metrics, which items are most commonly excluded from
non-GAAP earnings, and the value of these items (e.g., Bentley et al., 2017; Black et al., 2017b). What remains unclear,
however, is what has changed about non-GAAP reporting during this time period that resulted in its recent prolifera-
tion. In addition, are certain sectors pushing the use of these non-GAAP metrics, or are they being embraced across all
firms? Using a detailed dataset containing firms’ individual non-GAAP exclusions across time, we shed new light on the
current non-GAAP reporting environment.
3.1 Sample selection

Our sample is based on the dataset used by Black et al. (2017b), which is constructed as follows (see also Section 3.1
of Black et al., 2017b). For firms in the S&P 500 as of July 9, 2015, two certified public accountants review the 2009–
2014 fourth quarter earnings announcements to identify firms that report annual non-GAAP earnings. For firms that
provide these metrics, the hand collectors identify the individual items and values that each firm excludes from their
non-GAAP calculations. This collection process yields a full cross-section and time series of firms’ detailed non-GAAP
calculations.28 The final dataset is comprised of 2,586 firm-year observations, with 1,646 of the observations (63.7%)
disclosing annual non-GAAP earnings (Panel A of Table 2).29 We define the variables used in our descriptive evidence
in Panel B of Table 2, which includes broad categorizations that are similar to definitions found in the extant literature
(e.g., Total Exclusions, Nonrecurring Exclusions, Recurring Exclusions) and the fourteen individual adjustments that com-
prise these broader categories (e.g., Restructuring, Stock Compensation). In addition, we have an Uncommon Exclusions
category, which relates to adjustments that do not fit with the other adjustment types and are not common enough
27 https://www.issgovernance.com/solutions/iss-analytics/iss-incentive-lab/ (accessed October 10, 2017).

28 Jack Ciesielski had this data originally collected for subscription-based practitioner articles (e.g., Ciesielski, 2015). His data collection process is ongoing for
S&P 500 firms. We limited our sample to S&P 500 firms over a six-year time horizon (2009–2014). Firms that fall out of the S&P 500 during our sample period
are not included in the sample, while firms that joined the S&P 500 during our sample period are back-filled to collect their non-GAAP reporting practices for
our entire sample period. This collection process biases toward larger, successful firms and is also used by Ciesielski and Henry (2017).
29 Black et al. (2017b) also impose the following restrictions in their sample selection: they (1) exclude real estate investment trusts (REITs) because there is
less discretion in the non-GAAP reporting for this set of firms, (2) require Compustat, CRSP, and I/B/E/S data for the observations, and (3) require the data to
pass several other validity checks. See their table 1 for more detail on the sample selection.
276 BLACK ET AL .
TA B L E 2 Sample selection, variables, and exclusion definitions
Panel A: Sample Selection Observations Firms

Annual S&P observations for fiscal years 2009–2014 (defined as of July 9, 2015). 3,000 500
Observations remaining after removing Real Estate Investment Trusts (REITs), 2,586 465
matching with the Compustat/CRSP Merged Database, I/B/E/S, and requiring
data validity checks and nonmissing values.
Observations with annual non-GAAP earnings. 1,646 351
Panel B: Variable and Exclusion Definitions
Variable Name Description
Total Exclusions = The sum of all exclusions noted below, excluding Uncommon and Tax Adjustment, scaled by
diluted shares outstanding
Nonrecurring Exclusions = The sum of all nonrecurring exclusions, scaled by diluted shares outstanding. Nonrecurring
exclusions includes Restructuring, Tax Resolution, Acquisition, Impairment, Legal, Divestiture,
Debt Extinguishment, and R&D Tax Credit
Recurring Exclusions = The sum of all recurring exclusions, scaled by diluted shares outstanding. Recurring
exclusions includes Investment, Amortization, Stock Compensation, Pension, Interest Expense,
and Currency
Uncommon Exclusions = The magnitude of uncommon exclusions per share (Uncommon), scaled by diluted shares
outstanding
Exclusion Name
Restructuring = Restructuring items
Tax Resolution = Tax resolution or tax change items
Acquisition = Acquisition-related gains or losses
Impairment = Impairment-related costs
Legal = Legal-related revenues or costs
Divestiture = Divestiture-related gains or losses
Debt Extinguishment = Gains or losses on extinguishment of debt
R&D Tax Credit = R&D tax credit
Investment = Investment-related gains or losses
Amortization = Amortization of intangibles
Stock Compensation = Stock-based compensation items
Pension = Pension-related items
Interest Expense = Interest-related revenues or costs
Currency = Foreign currency exchange gains or losses
Uncommon = Items not previously classified in other categories
Tax Adjustment = Typically tax adjustments related to other NG adjustments
to warrant their own classification.30 Further, we also have a Tax Adjustment category, which pertains, typically, to tax
adjustments related to other non-GAAP adjustments.
3.2 Non-GAAP reporting: Frequency, counts, and magnitudes

Black et al. (2017b) provide evidence that non-GAAP reporting among S&P 500 firms has increased from 53% in 2009
to 71% in 2014. We expand on this reporting trend to provide a clearer picture about which sectors are driving this
change over time. In Figure 2, we present non-GAAP reporting frequency by sector for the following fiscal years: 2009,
30 As a result, the Uncommon Exclusions category comprises firms’ most idiosyncratic adjustments and is not included as part of our Total Exclusions category,
which captures the Recurring and Nonrecurring Exclusions categories.

BLACK ET AL . 277
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2009 2011 2014
FIGURE 2 Non-GAAP reporting frequency by sector-year
2011, and 2014. We find that non-GAAP reporting frequency has increased across all sectors during our sample period,
with the largest increases occurring in the Consumer Discretionary (59.3% increase), Industrials (58.3% increase), and
Energy (57.1% increase) sectors.31 Interestingly, although non-GAAP reporting is often viewed as being important to
technology or pharmaceutical firms, we find that non-GAAP reporting has become commonplace across all of our sec-
tors. In addition, the prominence of non-GAAP reporting in Figure 2 challenges the common belief that these alter-
native earnings metrics are primarily used by younger startup firms, as our sample is comprised of large firms in the
S&P 500.
In Figure 3, we report evidence on the number of adjustments non-GAAP reporting firms make in calculating
their non-GAAP numbers. Panel A reports non-GAAP exclusion counts by year and classifies them into the follow-
ing categories: Total Exclusions, Nonrecurring Exclusions, Recurring Exclusions, and Uncommon Exclusions. Total Exclusions
encompass both Nonrecurring and Recurring Exclusions, with these latter exclusion categories relating to exclusion types
that are traditionally categorized as “nonrecurring” or “recurring” in the extant literature (Christensen et al., 2014).32
Uncommon Exclusions are as previously defined. Across our sample, we find that firms exclude an average of 3.3 items
from their non-GAAP calculations (i.e., sum of Nonrecurring Exclusions, Recurring Exclusions, and Uncommon Exclusions).
We find an overall increase across time in all of the exclusion categories. For example, the average number of Total Exclu-
sions for a firm is 2.7 in 2009 versus 3.1 in 2014. Nonrecurring Exclusions are more common than Recurring Exclusions,
with firms excluding an average of 2.1 nonrecurring items versus 0.9 recurring items. Uncommon Exclusions usage is also
increasing across time, growing 28.6% over our sample period, from 0.35 to 0.45. As a result, not only are firms report-
ing non-GAAP metrics more frequently than before, but more items are being excluded from non-GAAP calculations.
In Panel B, we present the average number of Total Exclusions that non-GAAP reporters exclude by sector. We find
that the Health Care, Information Technology, and Telecommunication Services sectors exclude at least 3.5 items from
their non-GAAP calculations. Firms in the remaining sectors exclude at least 2 items, on average, with the Finan-
cials sector excluding the fewest number of items. In untabulated analyses, we find that the Consumer Staples and
31 The Telecommunication Services sector has only five observations per year. In 2009, zero firms reported non-GAAP metrics, and in 2014 four of the five
firms reported non-GAAP metrics. Given the small number of firms in this sector, inferences related to this sector should be tempered.
32 Total Exclusions, by design, do not include Uncommon Exclusions (which may involve one or more unclassifiable individual exclusions) or Tax Adjustment. Non-
recurring Exclusions include the following adjustment types: Restructuring, Tax Resolution, Acquisition, Impairment, Legal, Divestiture, Debt Extinguishment, and R&D
Tax Credit. Recurring Exclusions include the following adjustment types: Investment, Amortization, Stock Compensation, Pension, Interest Expense, and Currency.
Total Exclusions include all of the adjustment types in Nonrecurring and Recurring Exclusions.
278 BLACK ET AL .
Panel A: Non-GAAP Exclusion Counts by Year

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2009 2010 2011 2012 2013 2014
Total Exclusions Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions
Panel B: Total Exclusion Counts by Sector

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Panel C: Non-GAAP Exclusion Counts by Sector

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions
FIGURE 3 Non-GAAP exclusion counts by year and sector

BLACK ET AL . 279
Materials sectors have seen the largest increases in the number of Total Exclusions (61% and 53%, respectively), while
the Consumer Discretionary, Financials, Health Care, Industrials, and Utilities sectors have remained relatively stable
in their number of adjustments. When we partition sector-level exclusion counts into Recurring Exclusions, Nonrecurring
Exclusions, and Uncommon Exclusions (Panel C), we find that the Telecommunications Services, Health Care, and Energy
sectors exclude the most nonrecurring items (ranging from 2.5 items to 3.0 items), while the Information Technology
and Health Care sectors exclude the most recurring items (1.7 items and 1 item, respectively). In addition, nonrecurring
item exclusions are more commonly used relative to recurring item exclusions in all sectors.
Next, we examine how the magnitude of firms’ adjustments has changed across time. In Panel A of Figure 4, we
present the average exclusion value per year for our four exclusion categories. For ease of interpretation, we present
expense items as positive values and gain items as negative values. We find that Total Exclusions has substantially
increased over our sample period, from 0.73 in 2009 to 1.03 in 2014. This change represents a 41.1% increase in the
amount of expenses that firms exclude from their non-GAAP metrics on an annual basis. The increase in exclusion mag-
nitude is primarily due to Nonrecurring Exclusions, which has nearly doubled in exclusion magnitude during our sample
period. In contrast, both Recurring Exclusions and Uncommon Exclusions have slightly declined since 2009; however, both
types of exclusions remain economically large (average of 0.44 and 0.10 over our sample period, respectively). Com-
bining this evidence with the evidence in Figure 3 indicates that the additional items that firms exclude across time
(Panel A of Figure 3) likely relate to expense items, resulting in an overall increase in the amount of expenses that firms
exclude from their non-GAAP calculations (Panel A of Figure 4).
In Panel B, we examine which sectors have the largest Total Exclusions. The Energy and Healthcare sectors have
the largest exclusions, with these firms excluding at least $1.25 per diluted share of expenses during the year, on
average. The Information Technology and Materials sectors are the next largest excluders, with approximately 80
cents per diluted share of expense exclusions. None of the remaining sectors exclude more than 55 cents per diluted
share during the year. We present evidence on Recurring, Nonrecurring, and Uncommon Exclusion categories in Panel
C. The large exclusions in the Energy sector presented in Panel B relate to Nonrecurring Exclusions, while the sec-
tor average for Recurring Exclusions is essentially zero and Uncommon Exclusions relate to gain items, on average.
Excluded values in the Materials sector are also primarily comprised of Nonrecurring Exclusions. In contrast, exclu-
sions in the Health Care and Information Technology sectors primarily relate to Recurring Exclusions, relative to
the other exclusion types, since these firms exclude an average of $0.84 and $0.72 per diluted share of recurring
expenses.
3.3 Trends in the most common non-GAAP exclusions

Our next set of descriptive analyses relates to the most common types of exclusions. The most common Nonrecurring
Exclusions relate to Restructuring, Tax Resolutions, and Acquisitions exclusions (Black et al., 2017b). We plot the frequency
of these exclusions across time in Panel A of Figure 5. The largest increase in exclusion frequency relates to Acquisitions,
which increased from 26.7% to 35.8% over our sample period (34.1% increase). The exclusion frequency of Restructur-
ing and Tax Resolutions has also changed over time; however, the time series for these exclusions are more volatile in
nature and it is difficult to conclude whether their frequency is ultimately increasing or decreasing over time. Finally, we
also plot the frequency of Uncommon Exclusions across time in Panel A. We find that these adjustments increased from
34.7% to 44.5% (28.2% increase) over our sample period, indicating that more firms are adjusting for items that other
firms do not commonly exclude from their non-GAAP calculations. When we examine exclusion magnitude across time
(Panel B), the magnitude of Acquisition exclusions has generally increased across the sample period ($0.07 per diluted
share in 2009 to $0.43 per diluted share in 2014), while Restructuring exclusions increased during the second half of
our sample. Tax Resolutions values have remained relatively stable, with the exception of 2011, while the Uncommon
Exclusions values have seen an overall decline.
In Panel A of Figure 6, we plot the most frequent Recurring Exclusions by year, which relate to Investments, Amorti-
zation, Stock Compensation, and Pension exclusions (Black et al., 2017b). We find that Pension exclusions have seen the
largest increase in frequency, from 5.8% to 15.2%. In contrast, the frequency of the remaining recurring exclusions has
280 BLACK ET AL .
Panel A: Non-GAAP Exclusion Magnitudes by Year

1.20
1.00
0.80
0.60
0.40
0.20
0.00
2009 2010 2011 2012 2013 2014
-0.20
Total Exclusions Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions
Panel B: Total Exclusion Magnitudes by Sector

1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Consumer Consumer Staples Energy Financials Health Care Industrials Informaon Materials Telecommunicaon Ulies
Discreonary Technology Services
Panel C: Non-GAAP Exclusion Magnitudes by Sector

1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
-0.20
-0.40
Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions
FIGURE 4 Non-GAAP exclusion magnitudes by year and sector

BLACK ET AL . 281
Panel A: Frequency by Year

55%
50%
45%
40%
35%
30%
25%
20%
2009 2010 2011 2012 2013 2014
Restructuring Tax Resoluon Acquision Uncommon
Panel B: Magnitude by Year

0.50
0.40
0.30
0.20
0.10
0.00
2009 2010 2011 2012 2013 2014
-0.10
-0.20
-0.30
-0.40
Restructuring Tax Resoluon Acquision Uncommon
FIGURE 5 Most common nonrecurring item exclusions: Frequency and magnitude by year
been relatively stable across time, with only minor increases (investment and amortization) or decreases (stock com-
pensation) when comparing 2009 to 2014. In Panel B, we provide evidence indicating that the exclusion magnitudes for
Amortization and Stock Compensation have increased over time. For example, Stock Compensation increased from $0.31
to $0.64 per diluted share over our sample period, while Amortization increased from $0.56 to $0.78 per diluted share.
Finally, with the exception of 2013, Pension exclusions have increased across our sample, while Investment exclusion
magnitudes have generally declined.
282 BLACK ET AL .
Panel A: Frequency by Year

30%
25%
20%
15%
10%
5%
0%
2009 2010 2011 2012 2013 2014
Investment Amorzaon Stock Compensaon Pension
Panel B: Magnitude by Year

1.00
0.80
0.60
0.40
0.20
0.00
2009 2010 2011 2012 2013 2014
-0.20
-0.40
Investment Amorzaon Stock Compensaon Pension
FIGURE 6 Most common recurring item exclusions: Frequency and magnitude by year
3.4 Frequency and variation of non-GAAP reporting

Figure 7 plots exclusions in our hand collection, with the x-axis relating to Frequency and the y-axis relating to Variation.
We define Frequency as the percentage of years in which a firm excludes a specific item, requiring the firm to exclude
the item in at least one year. For example, if a firm excludes an impairment in two years of our six-year sample, their
Frequency score is 33.3%. As a result, this variable provides evidence on how commonly firms exclude particular items
on average during our sample period. We define Variation as the standard deviation of a firm's non-zero exclusion
BLACK ET AL . 283
F I G U R E 7 Scatter plot of exclusion frequencies and coefficients of variation

Notes: This figure reports sample means of firm-specific exclusion frequencies and coefficients of variation for firms
with at least one non-zero exclusion value by exclusion type.
values divided by the absolute value of the firm's mean non-zero exclusion value for that adjustment type.33 As a result,
Variation represents the coefficient of variation for each exclusion type and provides a standardized measure of disper-
sion in the values that firms exclude for particular items across our sample period, on average.
Across the categories of exclusions, we find large variation in Frequency. For example, firms that exclude stock com-
pensation or amortization make these adjustments throughout most of our sample period (88.2% and 75.5%, respec-
tively), while firms that exclude debt extinguishment or currency-related transactions make these adjustments less
commonly (43.3% and 45.4%, respectively). Interestingly, we find that restructuring charges, which are often labeled
by firms and researchers as not relating to core performance, have a high Frequency score. For example, for firms that
exclude restructuring charges at some point during our sample period, we find that they have restructuring exclusions
in 72.7% of their firm-years. Acquisitions also appear common, as firms with these exclusions exclude them in nearly
62% of our sample. Finally, firms with uncommon exclusions appear to exclude these items in 60.3% of their firm-years,
suggesting that these adjustments are relatively common for these firms even though other firms do not typically make
similar adjustments.
We find that Variation is less than 100% for four of the exclusion types (Stock Compensation, Interest Expense, Amor-
tization, and Debt Extinguishment), and is smallest for Stock Compensation (36.4%, respectively). This evidence indicates
that when firms exclude these items, their exclusion values are more stable (i.e., less disperse) than the values for the
remaining exclusion types. In contrast, we find that Investments and Divestitures have large Variation (434% and 349%,
respectively), indicating that they have the largest variation across time in their exclusion values. When considering the
Uncommon Exclusions category, we find that Variation is 468%, which is the highest Variation score across the exclusion
categories presented in Figure 7, indicating that when firms exclude these uncommon adjustments, the adjustments
have sizable variation in their values across time.34
33 For example, suppose a firm excludes the following amounts for stock compensation in years 2009–2014: $100, $120, $125, $145, $150, $170. Since the
standard deviation for these values is $22.73, while the mean exclusion value is $135, Variation is 16.8% (22.73/135).
34 While we present Tax Adjustment exclusions in Figure 7, we do not discuss these exclusions because they are typically the tax effects related to the var-
ious non-GAAP exclusions. In addition, we do not present Tax Resolution adjustments in Figure 7 because the Variation score for this variable is 1,044% (Fre-
quency = 55.5%). Moreover, we do not present R&D Tax Credit adjustments because the Variation score for this variable is 6,480% (Frequency = 31.9%). Including
these variables skews the figure and hinders the interpretability of the other variables.
284 BLACK ET AL .
4 FUTURE RESEARCH ON NON-GAAP REPORTING
As mentioned previously, regulators, standard setters, and many other constituents are currently focused on the ram-
ifications of the recent growth in non-GAAP performance metrics. We draw on insights from prior academic research,
concerns expressed by regulators and standard setters, and our descriptive evidence to suggest possible directions for
future research.
4.1 Stakeholder sophistication

While early empirical evidence (both experimental and archival) suggests that less sophisticated investors are more
likely than sophisticated investors to rely on non-GAAP information (Allee et al., 2007; Bhattacharya et al., 2007;
Elliott, 2006; Frederickson & Miller, 2004), subsequent research has found evidence that many different stakeholders
(who are presumably “sophisticated”) rely on non-GAAP performance metrics. For example, sell-side analysts revise
their forecasts based on non-GAAP information (Bhattacharya et al., 2003), credit analysts use adjusted performance
metrics (Batta & Muslu, 2017), compensation committees evaluate directors and executives based on non-GAAP earn-
ings targets (Black et al., 2017a; Curtis et al., 2017), creditors evaluate borrowers based on non-GAAP performance
metrics (Christensen et al., 2017b; Dyreng et al., 2017), and short sellers view non-GAAP earnings numbers as a red
flag indicating declining performance and lower quality reporting (Christensen et al., 2014; Bhattacharya et al. 2017).
Recent research has focused on various stakeholders, but a fundamental question with respect to investors is whether
early evidence indicating that non-GAAP reporting differentially influences less sophisticated investors still applies
today. Future research should consider whether new perceptions of non-GAAP disclosure have changed how sophisti-
cated investors rely on non-GAAP disclosures in more recent years.
4.2 Recurring exclusions

Prior research indicates that non-GAAP exclusions have evolved over time. Recurring item exclusions, which have typ-
ically been viewed as opportunistic in the extant literature, have become much more common in recent years, in part,
because of changes in accounting standards dealing with complex transactions (SFAS 123R). One of the basic tenets of
non-GAAP reporting is that managers, analysts, and other constituents desire a salient measure of sustainable operat-
ing performance, and critics have long argued that the exclusion of recurring items is less justifiable (e.g., Bhattacharya
et al., 2003; Doyle et al., 2003). Yet, managers have continued to argue that some recurring items represent “non-cash”
components of earnings and excluding them is informative. If recurring exclusions really are a signal of aggressive and
opportunistic reporting, how do managers continue to benefit from making these same adjustments year after year
while explicitly disclosing them to investors? Is it possible that investors could really be fooled time and time again?
Have investors simply “bought in” on the argument that the exclusion of recurring items is justifiable? Have the proper-
ties of recurring items changed from these earlier analyses so that their exclusion is now informative? Gaining a better
understanding about why firms exclude recurring items is important because these adjustments represent a sizable
portion of all non-GAAP exclusions, and it is difficult to reconcile the perception that these adjustments are oppor-
tunistic if investors learn over time.
4.3 Perception management

While prior research suggests that non-GAAP disclosures are often used as a last-ditch effort to appear to meet
strategic performance benchmarks after other perception management tools (such as real and accruals earnings man-
agement) have been employed (Black et al., 2017c),35 this result is somewhat puzzling since non-GAAP disclosure
35 Black et al. (2017c) also find general evidence of an inverse relation between earnings management and accruals management. Guggenmos et al. (2017)
find consistent experimental evidence. They find that managers are less likely to engage in aggressive accruals management when they have the opportunity
to report non-GAAP earnings.
BLACK ET AL . 285
is relatively costless compared to earnings management techniques, which have real costs.36 Future research might
investigate why non-GAAP reporting is not employed first, as it may be relatively costless in nature, and whether the
decision to disclose non-GAAP earnings, relative to real and accruals management, is associated with opportunism.
4.4 Other non-GAAP performance metrics

The non-GAAP reporting literature has primarily focused on adjusted bottom-line EPS or adjusted operating EPS.
While some early research has explored other non-GAAP performance metrics (e.g., Marques, 2006), most studies
have focused explicitly on non-GAAP EPS measures. Recent evidence suggests that firms also report other non-GAAP
performance measures than bottom-line EPS. For example, Brown et al. (2017) find that IPO firms frequently report
adjusted EBITDA. Similarly, compensation committees focus on a variety of earnings-based metrics (GAAP and non-
GAAP) when designing executive compensation plans (Curtis et al., 2017). Some firms voluntarily disclose other non-
financial performance metrics like web traffic or store openings as another means to capture performance.37 Future
research could explore non-GAAP performance metrics other than bottom-line earnings, and non-financial metrics, to
examine whether results related to non-GAAP earnings apply to other non-GAAP performance metrics (both financial
and non-financial) and whether these other measures incrementally inform financial statement users beyond tradi-
tional non-GAAP earnings metrics.
4.5 Disagreement between managers and analysts

As discussed previously, one of the most debated issues in the non-GAAP literature relates to the different roles of
managers and analysts in determining non-GAAP earnings calculations. Bentley et al. (2017) provides the most current
evidence on these roles. Although they find that managers’ and analysts’ non-GAAP reporting agrees the majority of
the time, they also find that managers’ and analysts’ reporting choices can differ. Discussants of published papers have
questioned the reasons for differences in managers’ and analysts’ reporting choices and highlight that these situations
could be the more interesting settings to examine non-GAAP reporting incentives (e.g., Berger, 2005; Bradshaw, 2011;
Easton, 2003). Better understanding the extent to which managers and analysts disagree and why they disagree could
shed light on the differing motives and incentives of managers and analysts.
In addition, evidence on how these parties interact and influence the other party's non-GAAP reporting practice
would be an important step forward in both the non-GAAP and voluntary disclosure literatures. For example, in review-
ing the financial reporting environment, Beyer et al. (2010, p. 335) note that “one of the biggest challenges and oppor-
tunities facing researchers is considering the interactions among the various information sources.” The non-GAAP
literature seems like a suitable setting to explore these interactions because (1) both managers’ and analysts’ assess-
ments of performance can be identified and (2) there is clearly information flow between the two parties regarding
non-GAAP earnings, suggesting that there is an opportunity for one party to influence the other. Evidence that clari-
fies managers’ and analysts’ roles in non-GAAP reporting and the extent to which managers push these voluntary dis-
closures into financial markets versus these metrics being demanded by parties outside of the firm would significantly
contribute to the literature.
4.6 Regulatory scrutiny

As explained previously, regulators have expressed significant concern about the potential for non-GAAP reporting
to mislead investors. In particular, decision makers and regulators in the US, from Congress (SOX—2002) to the SEC
(Reg. G—2003) to the SEC staff (C&DIs of 2010 and 2016), have continually expressed concern and provided restric-
tions and guidance on this form of voluntary disclosure. However, despite calls from the financial press and speeches
36 In the early days of non-GAAP reporting, these disclosures were viewed as being “costless” to managers. In today's reporting environment, the SEC closely
monitors firms’ compliance with Reg. G and later with SEC CD&Is. Hence, there could be real regulatory and reputation costs associated with misreporting.
37 See Francis, Schipper, and Vincent (2003) for more detail regarding some of these alternative performance measures.
286 BLACK ET AL .
of key regulators, examples of a smoking gun are often few and far between. While the opacity of non-GAAP reporting
two decades ago left room for investors to be misled (whether or not managers specifically intended to provide misin-
forming information), today's environment is much different since non-GAAP disclosures are more transparent (due to
mandatory reconciliations, restrictions imposed by the SEC, and ex post scrutiny by regulators). Recent evidence sug-
gests that, on average, managers provide non-GAAP performance metrics to better inform stakeholders. We do not
contest the fact that the financial press, regulators, and academics still find examples of potentially abusive non-GAAP
disclosures. Nevertheless, these examples may depict the tails of the distribution rather than the norm, and regulatory
scrutiny has continued to increase even in the current reporting environment. Future research can help to reconcile
the difference between academic research, which indicates that non-GAAP reporting quality has improved over time
and is now primarily used for informative reasons, to the increased regulatory concern about non-GAAP reporting.
In addition, other constituents (e.g., investors and analysts) play a role in demanding or creating these alternative
metrics.38 As a result, these metrics would likely exist in the marketplace even if managers did not explicitly report
them. For example, managers do not always explicitly provide non-GAAP performance metrics, but can instead provide
more general forms of disclosure about potential adjustments that analysts convert to non-GAAP adjustments and
pass on to investors (Bentley et al., 2017). Therefore, as the SEC considers potential regulation of non-GAAP reporting,
it is important for the SEC to consider the multiple information channels through which non-GAAP information enters
capital markets. Any academic insight on this front would be enlightening.
Finally, prior research indicates significant differences across countries in the level of governance and restrictions
regarding non-GAAP reporting (e.g., Isidro & Marques, 2015). Future research should specifically compare these vary-
ing regulatory environments to that of the US in order to better understand how regulation influences disclosure
behavior. Researchers could exploit differences in accounting rules, regulations, enforcement, and regulatory and
transaction timing to provide insight in this direction.
4.7 Changes to GAAP

Standard setters have questioned why users of financial statements find non-GAAP earnings to be useful and specif-
ically what this form of public demand for adjusted performance metrics signals about GAAP-based financial state-
ments (Golden, 2017; Hoogervorst, 2015; Linsmeier, 2016). For example, one of the most common adjustments to
non-GAAP calculations resulted from recent accounting rule changes in SFAS 123R. One implication could be that non-
GAAP reporting is more necessary for more complex businesses. Future research could explore this conjecture. To the
extent that GAAP-based earnings are meant to inform investors, what does it mean that a significant number of these
constituents are undoing the effects of the rule changes through non-GAAP reporting?39 Do financial statement users
not understand the importance of the changes, and if not, why have they not learned that they are missing important
earnings components during the many years since these changes were implemented? More insight into these ques-
tions would not only inform the literature on the motives for certain non-GAAP adjustments, but it would also provide
feedback to standard setters to consider during the standard-setting process.
In addition, the FASB's recent consideration of performance reporting improvements on the income statement
would clearly increase the transparency of firm performance and increase users’ abilities to tailor performance met-
rics to meet their individual needs (Linsmeier, 2016). An obvious question is whether these potential changes to the
income statement format (resulting in greater disaggregation) would affect investors’ demand for non-GAAP metrics
and managers’ choices to provide these metrics. Moreover, as investors can more easily focus on differing performance
metrics, will investors have even less consensus regarding future performance expectations?
38 The role of auditors in non-GAAP reporting has seen less attention in the extant literature because non-GAAP metrics in the US are primarily reported in
8-K earnings announcements and not in firms’ 10-Q/Ks. However, the PCAOB has recently expressed interest in better understanding the role of the auditor
in the presence of non-GAAP reporting (PCAOB, 2016).
39 For example, in the UK one might view non-GAAP reporting as management's attempt to comply with the “true and fair” view of financial reporting when
IFRS do not meet the perceived needs of investors (Crump, 2014; Livne & McNichols, 2009).
BLACK ET AL . 287
4.8 Research designs in non-GAAP research

One of the most common ways in which prior research examines the quality of non-GAAP reporting is to examine
how non-GAAP exclusions associate with future firm performance. The argument for this measure of quality is that
managers and analysts claim that the excluded items do not represent a firm's “core” operations. Thus, non-GAAP
exclusions should not have an association with future performance. Doyle et al. (2003) were the first to evaluate the
quality of non-GAAP exclusions using this design by regressing future cash flows on total exclusions. Easton (2003),
however, questions the use of future cash flows to assess exclusion quality. Therefore, Kolev et al. (2008) regress future
operating earnings on exclusions. However, some researchers have argued that using future earnings as the dependent
variable in these tests may result in a mechanical relation between future performance and current exclusions. While
this approach would predict zero association between future earnings and current transitory-item exclusions, it would
posit a mechanical association between future earnings and current recurring exclusions.40 Whipple (2016) advocates
a dual approach—performing persistence tests with both earnings and cash flows, as managers do not dispute that
these items affect earnings, but instead argue that they are “non-cash” in nature. Thus, using both earnings and cash
flows provides evidence related to the different justifications for exclusions; some excluded items are truly transitory
and some are truly non-cash. To the extent that both earnings and cash flow tests point to similar conclusions, we can
better understand the nature of different types of exclusions and evaluate managers’ motives.
In addition to examining the association between exclusions and future performance, other common methods to
assess non-GAAP reporting quality are examining investors’ pricing of non-GAAP earnings and whether firms strate-
gically use non-GAAP metrics for benchmark-beating purposes. Although these are useful measures of quality, other
measures that can identify different dimensions of non-GAAP reporting quality would be useful in expanding the lit-
erature and our understanding of how non-GAAP reporting affects financial statement users. Recently, some studies
have begun to utilize other measures. For example, Bradshaw et al. (2017) examine whether non-GAAP reporting leads
to more common versus idiosyncratic belief in a firm's information environment using a “consensus” metric developed
by Barron, Kim, Lim, and Stevens (1998), while Heflin, Kolev, and Whipple (2017) examine how non-GAAP reporting
informs on a firm's equity and credit risk.
5 CONCLUSION
This paper (1) summarizes what we know from the extant academic literature regarding non-GAAP disclosure, (2) pro-
vides descriptive evidence on the current state of non-GAAP reporting using a novel dataset of detailed non-GAAP
disclosures, and (3) offers suggestions for future researchers to consider. These insights should be useful to academics
attempting to understand the scope of the extant literature and regulators and practitioners interested in better
understanding the practice of non-GAAP reporting. It is clear that the nearly two decades of research on non-GAAP
reporting has led to many important insights into why non-GAAP earnings exist and how these measures are used
in financial markets. Although the non-GAAP literature has matured through these important insights, the dynamic
landscape of non-GAAP reporting leads us to see a path of continued growth in the non-GAAP literature. In particu-
lar, recent changes in the non-GAAP reporting landscape, increased data availability, and the renewed interest from
regulators and standard setters has generated many new and interesting research questions to consider.
40 In contrast, if firms consistently exclude items that they label as “transitory,” even though they make these adjustments every year (e.g., restructuring exclu-
sions; see Figure 7), then regressing future operating earnings on exclusions might mechanically miss the association between transitory items and earnings.
Researchers commonly use operating earnings to examine the exclusions/earnings association, which is a Compustat-defined metric that excludes “transitory”
items. Thus, using operating earnings as a dependent variable will miss the earnings implications for routine “transitory” items because operating earnings does
not include these items. Using GAAP earnings as the future performance metric would better detect the earnings implications of routine transitory exclusions.
288 BLACK ET AL .
ACKNOWLEDGEMENTS
We thank the editors, Andy Stark and Peter Pope, Gilad Livne (the 2017 JBFA Capital Markets Conference discus-
sant), and an anonymous referee for helpful comments and suggestions. We also express gratitude to Melissa Herbold-
sheimer and Paula Tanabe for their extensive efforts in hand collecting the data used in this study. We thank Enrique
Gomez, Jasmine Wang, and Alex Felsing for their research assistance and Denny Beresford for his valuable insights.
Finally, we express gratitude to Kris Allee, Nerissa Brown, Rick Cazier, Vicky Kiosse, Ana Marques, Roy Schmardebeck,
and participants at the 2017 JBFA Capital Markets Conference, a 2016 FASB Project Development Session on non-
GAAP reporting, and a University of Western Australia workshop for helpful comments. (Paper received April 2017,
revised revision accepted November 2017)
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How to cite this article: Black DE, Christensen TE, Ciesielski JT, Whipple BC. Non-GAAP reporting: Evidence
from academia and current practice. J Bus Fin Acc. 2018;45:259–294. https://doi.org/10.1111/jbfa.12298

Black VD (2018) Non-Gaap Reporting: Evidence From Academia and Current Practice

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DOI: 10.1111/jbfa.

Non-GAAP reporting: Evidence from academia and

1 Dartmouth College, Tuck School of Business,

Hanover, New Hampshire, USA Abstract

J Bus Fin Acc. 2018;45:259–294. wileyonlinelibrary.com/journal/jbfa

2 REGULATORY, STANDARD SETTING, AND ACADEMIC FOUNDATIONS

2.1 Regulatory and standard setting influences on non-GAAP reporting

Date Description Source

October 17, 2017

2.2 Understanding the non-GAAP reporting literature

Panel A: Non-GAAP Papers by Journal

Panel B: Non-GAAP Papers: Web of Science Citations

North American Journals UK Journals Internaonal

FIGURE 1 Non-GAAP papers and citations

2.3 Understanding non-GAAP reporting in the broader voluntary disclosure literature

2.4.1 Do investors pay attention to non-GAAP performance metrics?

2.4.2 Who uses non-GAAP information?

2.4.3 What adjustments are commonly used to calculate non-GAAP earnings?

2.4.6 Does measurement error cast doubt on prior evidence?

2.4.7 How has regulation influenced non-GAAP reporting?

2.4.8 How do other monitoring or disciplining mechanisms influence non-GAAP disclosure?

2.4.9 How does non-GAAP reporting differ outside of the US?

2.4.10 Sources of non-GAAP data

analysts following the firm.

3 SAMPLE SELECTION AND DESCRIPTIVE EVIDENCE

3.1 Sample selection

27 https://www.issgovernance.com/solutions/iss-analytics/iss-incentive-lab/ (accessed October 10, 2017).

TA B L E 2 Sample selection, variables, and exclusion definitions

Panel A: Sample Selection Observations Firms

3.2 Non-GAAP reporting: Frequency, counts, and magnitudes

which captures the Recurring and Nonrecurring Exclusions categories.

2009 2011 2014

FIGURE 2 Non-GAAP reporting frequency by sector-year

Panel A: Non-GAAP Exclusion Counts by Year

Total Exclusions Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions

Panel B: Total Exclusion Counts by Sector

Panel C: Non-GAAP Exclusion Counts by Sector

Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions

FIGURE 3 Non-GAAP exclusion counts by year and sector

3.3 Trends in the most common non-GAAP exclusions

Panel A: Non-GAAP Exclusion Magnitudes by Year

Total Exclusions Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions

Panel B: Total Exclusion Magnitudes by Sector

Panel C: Non-GAAP Exclusion Magnitudes by Sector

Recurring Exclusions Nonrecurring Exclusions Uncommon Exclusions

FIGURE 4 Non-GAAP exclusion magnitudes by year and sector

Panel A: Frequency by Year

Restructuring Tax Resoluon Acquision Uncommon

Panel B: Magnitude by Year

Restructuring Tax Resoluon Acquision Uncommon

Panel A: Frequency by Year

Investment Amorzaon Stock Compensaon Pension

Panel B: Magnitude by Year

Investment Amorzaon Stock Compensaon Pension

3.4 Frequency and variation of non-GAAP reporting

F I G U R E 7 Scatter plot of exclusion frequencies and coefficients of variation

4 FUTURE RESEARCH ON NON-GAAP REPORTING

4.1 Stakeholder sophistication

4.2 Recurring exclusions

4.3 Perception management

4.4 Other non-GAAP performance metrics

4.5 Disagreement between managers and analysts

4.6 Regulatory scrutiny