Non-GAAP Earnings Comparability and Cost of Equity Capital

SYNOPSIS This study examines the relationship between the comparability of non-generally accepted accounting principles (GAAP) earnings and the cost of equity capital. Using data from 1998 to 2020, we find that greater non-GAAP earnings comparability is associated with a lower cost of equity capital. Furthermore, the effect of non-GAAP comparability is in addition to and significantly greater than the effect of GAAP comparability. This suggests that investors place more weight on the comparability of non-GAAP figures in determining their required rate of return. Additional cross-sectional analyses suggest that the negative association between non-GAAP comparability and the cost of equity is more pronounced for firms with weaker information environment or those facing stronger product market competition. The findings highlight the importance of non-GAAP earnings comparability as a crucial factor affecting capital market participants. Our evidence also provides insights for policy makers seeking to improve the comparability of non-GAAP metrics. Data Availability: Data are available from the public sources listed in the text. JEL Classifications: M41.