The Quality of Non-GAAP Earnings in Australia

Accounting

Speaker:Stephen Taylor, University of Technology Sydney
Date: Tuesday 28 March 2017
Time: 11:00 - 12:30
Location: Forum Seminar Room 05

Further details

Abstract

We examine and compare the quality of non-GAAP and GAAP earnings using actual non-GAAP earnings reported in press releases by ASX 500 firms. We focus on several important earnings attributes, namely persistence, predictability, smoothness, timeliness and conservatism and value relevance. Our results support the information rationale for non-GAAP earnings disclosures. Non-GAAP earnings are found to be more persistent, smoother, and more value-relevant, and have higher predictive power. However, non-GAAP earnings have a lower degree of timeliness and conservatism than GAAP earnings. We also find that the differential quality between GAAP and non-GAAP earnings is more evident in large firms with lower market-to-book ratio and higher board independence. After the mandatory adoption of IFRS, non-GAAP earnings have become more persistent, predictable, and value-relevant than GAAP earnings. Overall, our results suggest that managers disclose non-GAAP earnings to aid investors’ assessment of firms’ underlying performance. The results also suggest that allowing firms’ flexibility in reporting components of earnings is beneficial.