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The risk-relevance of non-GAAP earnings

Author

Listed:
  • Frank Heflin

    (University of Georgia)

  • Kalin S. Kolev

    (Zicklin School of Business, Baruch College – CUNY)

  • Benjamin Whipple

    (University of Georgia)

Abstract

We study the risk-relevance of non-GAAP earnings. Risk is an important earnings attribute in valuation models, and the FASB’s conceptual framework identifies providing information about risk as a primary objective for earnings. Although prior research addresses the value-relevance of non-GAAP earnings, researchers have paid little attention to their risk-relevance. We find that non-GAAP adjustments yield an earnings number that isolates the more risk-relevant components of earnings. Excluded earnings components, however, contain some, albeit less, information about risk. Thus, although non-GAAP earnings can help investors prioritize the more versus less risk-relevant components of earnings, non-GAAP earnings are potentially most informative about risk when used together with GAAP earnings.

Suggested Citation

  • Frank Heflin & Kalin S. Kolev & Benjamin Whipple, 2024. "The risk-relevance of non-GAAP earnings," Review of Accounting Studies, Springer, vol. 29(1), pages 493-524, March.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09725-w
    DOI: 10.1007/s11142-022-09725-w
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    More about this item

    Keywords

    Non-GAAP earnings; Non-GAAP exclusions; Special items; Other item exclusions; Equity risk; Risk-relevance;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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