The use and effects of non-GAAP earnings in the Swedish setting

Abstract: Non-GAAP earnings are commonly reported figures that do not follow the guidelines for earnings defined by accounting standards but are constructed instead by the company managers without restraint. Lately, there has been an increased focus and discussion on the integrity of the non-GAAP earnings as they might give a misleading indication about the financial performance. Thus, European Securities and Markets Authority (ESMA) introduced a guideline on the use of non-GAAP earnings that came into effect in July 2016. The previous studies about the industry differences in non-GAAP reporting and the valuation impact of non-GAAP earnings have mainly focused on the American market. As a contrast to this, we manually gather data from interim reports of the companies listed on the Stockholm Stock Exchange on three different periods. We look at how commonly companies report non-GAAP earnings and conduct an event study to investigate the effect on stock price. We find out that the industry differences in non-GAAP reporting have decreased. In addition, the non-GAAP earnings have an impact on company valuation, especially when reported together with their GAAP counterparts. The introduction of the ESMA guidelines did not have any immediate effect. However, as the guideline was only recently introduced, the effect might not have been visible yet and should be re-estimated in the future.