Intangible-intensive firms and performance reporting

Abstract US GAAP requires most intangible investments to be expensed as incurred, potentially distorting performance measurement. We examine whether voluntary non-GAAP disclosures mitigate these distortions for intangible-intensive firms. We find that intangible-intensive firms are more likely to report non-GAAP performance metrics when GAAP earnings lack relevance and that the resulting exclusions are of higher quality. Challenging the prevailing view that high-quality exclusions are limited to transitory items, we demonstrate that non-GAAP disclosures can also enhance performance measurement by excluding investment expenditures. Consistent with this mechanism, we find that intangible-intensive firms are more likely to exclude investment-related expenditures, that their non-GAAP disclosures are associated with higher returns to intangible investments, and that removing R&D enhances the predictive relevance of the performance metric. These effects are unique to firms that expense, rather than capitalize, intangible assets, highlighting the role of non-GAAP reporting in mitigating distortions arising from the mandatory expensing of intangible investments.