The use of non‐GAAP measures in initial public offerings

AuthorBo Liu,Dana Zhang
Date01 October 2020
Published date01 October 2020
The use of non-GAAP measures in initial public offerings
Bo Liu PhD | Dana Zhang PhD
Sigmund Weis School of Business,
Susquehanna University, Selinsgrove,
Dana Zhang, Sigmund Weis School of
Business, Susquehanna University,
Selinsgrove, PA.
This study examines the use of non-GAAP measures (NGMs) in initial public
offerings (IPOs). Based on NGMs collected for a sample of 300 IPO firms from
2009 to 2013, we find that 60% of IPO firms disclose NGMs in their registration
filings. While a variety of NGMs are used, earnings before interest, tax, depre-
ciation, and amortization (EBITDA) and adjusted EBITDA are the most fre-
quently reported NGMs. The vast majority of the reported NGMs are greater
than the firms' GAAP earnings. The results also show that IPO firms are more
likely to disclose NGMs when their GAAP earnings are close to benchmarks,
when they report special items, and when they have a higher proportion of
intangible assets. In addition, the likelihood of reporting NGMs decreases for
IPO firms with high R&D expenditures.
initial public offering, non-GAAP measures
As alternative earnings measures voluntarily disclosed by
firms, non-GAAP measures (NGMs) have become
increasingly popular over the last 20 years (Black &
Christensen, 2018). While firms typically claim such
tailor-made metrics are a way for investors to better
understand their business(Maurer, 2019), the SEC has
expressed concerns about NGMs being potentially mis-
leading and has implemented the Regulation G in 2003,
which requires the reconciliation of NGMs with the
GAAP earnings. Despite the controversy around the use
of NGMs, disclosing such adjusted earnings numbers has
become a widespread practice (PwC, 2019). Understand-
ing how and when companies report NGMs can help the
investors and regulators assess the motivations and
incentives behind the use of such measures.
This study focuses on NGM reporting in the IPO pro-
spectus. Initial public offering is one of the most promi-
nent corporate events in a company's history, and the
IPO prospectus (S-1 filing) plays an important role in
shaping investors' perceptions and valuations of a com-
pany. Despite the potentially significant impact of the
IPO prospectus, there are little empirical evidence on the
use of NGMs in IPOs.
Prior studies on NGMs typically focus on the use of
NGMs in periodic earnings announcements. In general,
these studies offer two types of explanations for NGM
reporting. One argument is that managers disclose NGMs
because they want to exclude transitory items and report
core earnings that are more value relevant to investors.
Consistent with this view, researchers find that NGMs are
sometimes more persistent than GAAP earnings and some
Bradshaw & Sloan, 2002; Brown & Sivakumar, 2003). The
other argument is that managers are self-serving and dis-
close NGMs opportunistically to present rosier performance
to investors. Consistent with this argument, researchers
document that some managers exclude recurring expenses
such as R&D and stock compensation expenses, exclude
only transitory losses but not transitory gains, and use
NGMs to meet analyst expectations (Barth, Gow, & Taylor,
2012; Black & Christensen, 2009; Brown, Christensen,
Elliott, & Mergenthaler, 2012; Curtis, McVay, & Whipple,
2014; Doyle, Jennings, & Soliman, 2013).
Received: 23 March 2020 Revised: 29 June 2020 Accepted: 7 July 2020
DOI: 10.1002/jcaf.22463
60 © 2020 Wiley Periodicals LLC J Corp Acct Fin. 2020;

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