A contrast of the popularity and the interpretation of non-GAAP earning disclosures in different industries

This study examines non-GAAP disclosures in two selected industries, the consumer nondurable goods industry and the business services industry, to address the question of whether non-GAAP measures are applied and interpreted uniformly across industries, and more importantly, if the market reacts to non-GAAP disclosures similarly across different industries. Industry membership potentially has an impact on the usage and interpretation of non-GAAP disclosures; some industries issue their own policy trying to standardize the use of non-GAAP measures in their industry. However, industry effects on non-GAAP disclosures have not been thoroughly studied. This study fills in the gap. Using hand-collected non-GAAP measures disclosed in the 8-K reports from 308 firms in the selected two industries, this study finds that: (1) the use of non-GAAP measures is more popular than reported in previous studies, and non-GAAP measures are not limited to performance measures; (2) there is weak evidence of industry preference as to which non-GAAP measures are more popular in that industry; and (3) the market reacts differently to non-GAAP disclosures in different industries. Combining the empirical findings, this study documents industry effects and market reactions in the interpretation of non-GAAP disclosures. Considering that these effects have not been formally academically documented in previous studies, this study carries practical implications for investors and financial analysts.