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The Value Relevance of Mandatory Non‐ GAAP Earnings
Author(s) -
Venter Elmar R.,
Emanuel David,
Cahan Steven F.
Publication year - 2014
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12020
Subject(s) - earnings , relevance (law) , discretion , accounting , value (mathematics) , business , actuarial science , economics , political science , computer science , machine learning , law
This paper examines the value relevance of earnings components where there is a mandatory requirement to report generally accepted accounting principles ( GAAP ) earnings and non‐ GAAP earnings, and where the items to be eliminated from GAAP earnings are defined in detail. The setting is different from non‐ GAAP earnings disclosures presented in the United States and elsewhere, where managers have discretion over whether to report a non‐ GAAP earnings number, and what to exclude from GAAP earnings. Our mandatory setting enables us to report value relevance results that are not confounded by managers' discretionary choices regarding non‐ GAAP earnings exclusions. We use price‐level regressions, based on the O hlson (1995) model, to test for incremental and relative value relevance. The results show that non‐ GAAP earnings reported under a mandatory regime have higher value relevance than GAAP earnings. The disaggregation of these items is useful to investors in a setting where managerial motivations are minimized.