The Future Performance Implications of Non-GAAP-Motivated Investment

Abstract

We investigate whether having a policy of consistently reporting non-GAAP performance metrics is associated with investment efficiency. Prior research finds that managers who disclose non-GAAP performance measures increase investment levels, consistent with overinvestment. However, we find that increased investment associated with non-GAAP reporting is not necessarily indicative of overinvestment. Specifically, we explore the relation between investment and future cash flows as a proxy for the realization of investments in positive net present value projects. We find that the investments of firms that consistently report non-GAAP metrics are associated with higher future operating cash flows and abnormal returns, both of which are inconsistent with overinvestment. A path analysis reveals that the benefit of non-GAAP reporting stems from both a higher level of investment and a greater return per dollar of investment. Additional analyses suggest that reduced GAAP earnings pressure on investment decisions is a likely mechanism associated with changes in investment. Our evidence is consistent with non-GAAP reporting reducing a market friction and improving investment efficiency.