The Value Relevance of Mandatory Non-GAAP Earnings

type="main"> <p>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. <p>We use price-level regressions, based on the Ohlson (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.