When adjusted earnings make for smarter deals

In an era when nearly nine out of 10 S&P 500 companies report non-GAAP earnings, accounting professionals find themselves walking a fine line between transparency and optics. 

Regulators have long voiced concern that these adjusted metrics may mislead investors; yet a new study published in Contemporary Accounting Research suggests a more nuanced reality: When done right, non-GAAP disclosures can do more than help executives "tell their story." They can make markets work better — particularly in mergers and acquisitions.

In this study, my colleagues and I examined the association between transparent, high-quality non-GAAP reporting and real-world investment outcomes. The paper analyzes 669 public-company acquisitions between 2005 and 2016 — representing roughly $1.14 trillion in deal value — and finds that firms disclosing non-GAAP earnings more frequently tend to be associated with better M&A results.

When the numbers help the negotiation

The study's key takeaway is straightforward but powerful: when target companies publicly disclose non-GAAP earnings, bidders tend to make more efficient offers. Specifically, acquirers' stock prices react more positively at deal announcements when the target is a regular non-GAAP discloser. A one-standard-deviation increase in disclosure frequency correlates with a 0.68 to 1.02 percentage-point rise in bidder announcement returns — an economically meaningful bump in shareholder value.

Why does this happen? In M&A, information is everything, and much of it is asymmetric. Before signing confidentiality agreements, bidders rely on public data to screen targets and estimate synergies. Non-GAAP disclosures, when credible, give bidders an early glimpse of "core earnings," making valuations more precise and negotiations more grounded.

My coauthors and I have identified three main channels for this effect:

1. Reducing uncertainty early in the process: When preliminary discussions begin, acquirers must rely on public information. Non-GAAP figures help clarify a target's underlying profitability and normalize for unusual items.
2. Improving data quality: Because non-GAAP numbers released publicly are subject to investor and analyst scrutiny — and Regulation G requires reconciliation to GAAP — these figures tend to be more reliable than bespoke numbers privately shared during due diligence.
3. Serving as reference points: Public non-GAAP disclosures create a benchmark for assessing the credibility of private financials. When private and public numbers align, confidence in management rises; when they don't, it raises healthy skepticism.

The results were not only statistically robust, but also economically relevant across multiple deal metrics. Targets that disclosed adjusted earnings more often were associated with greater combined synergies, fewer goodwill impairments, and in some cases stronger post-acquisition operating performance. 

In essence, non-GAAP transparency appears to be associated with smarter capital allocation.

Quality counts, a lot

Of course, not all "adjusted" numbers are created equal. Only high-quality non-GAAP disclosures — those consistent with analysts' adjustments or with few SEC comment-letter issues — were associated with improved deal outcomes. Aggressive or inconsistent adjustments, in contrast, offered no discernible benefit.

To distinguish good from bad, we measured alignment between management-defined and analyst-defined non-GAAP earnings, and we also examined SEC correspondence. Firms receiving frequent comment letters about their non-GAAP presentation tended to have lower-quality disclosures and weaker associations with M&A success. The implication here is clear: transparency pays when it's credible.

That finding reinforces a point regulators have long emphasized. Non-GAAP reporting isn't inherently problematic; poor non-GAAP reporting is. When firms use clear definitions, consistent exclusions and rigorous reconciliations, these disclosures can enhance investor understanding.

Where non-GAAP adds the most value

Our research also identifies the contexts where non-GAAP reporting makes the biggest difference. The link between disclosure and deal efficiency was strongest for:

• Hard-to-value targets, such as firms with volatile earnings or limited analyst coverage.
• Companies with weaker information environments, where public data are scarce.
• Deals involving high-quality non-GAAP adjustments, for example, those aligning with analysts' views.

In other words, adjusted metrics appear most useful when uncertainty is greatest. That insight should resonate with CFOs managing businesses in complex, fast-changing industries — from biotech to tech services — where GAAP earnings alone may not capture the economic reality of operations.

Interestingly, our study also finds that frequent non-GAAP disclosers are more likely to become takeover targets in the first place. We believe this is evidence that public disclosure mitigates information risk and makes companies easier to evaluate, essentially putting them "on the radar" of prospective acquirers.

For accounting executives and dealmakers, these findings carry practical implications.

1. Rethink the role of non-GAAP reporting. Instead of treating adjusted earnings as just a marketing tool for quarterly calls, firms can use them strategically to communicate operational performance that GAAP metrics obscure. This can foster investor trust, and as the evidence shows, potentially attract better-informed suitors when opportunities arise.
2. Emphasize quality and consistency. The benefits of non-GAAP reporting materialize only when disclosures are credible. That means tight reconciliation to GAAP, explicit rationale for each exclusion, and internal controls over how adjustments are defined and reviewed. Leaders should establish governance policies that make non-GAAP reporting auditable in spirit, if not in regulation.
3. Use disclosures to prepare for the unexpected. Even if an acquisition isn't on the horizon, transparent reporting practices reduce valuation friction should an opportunity emerge. Think of robust non-GAAP reporting as part of your company's "readiness" posture.
4. Engage with regulators constructively. Our study suggests that oversight and quality assurance can complement, not contradict, the usefulness of non-GAAP figures. Executives can advocate for frameworks that balance flexibility with comparability rather than treating SEC guidance as a constraint.
5. Bridge communication with investors. Since analysts often develop their own "street" earnings adjustments, management teams can gain credibility by aligning their non-GAAP definitions with market conventions, or at least explaining deviations clearly.

Our main takeaway here is that accounting information — when disclosed thoughtfully — can improve not just compliance outcomes, but also economic ones. The study offers evidence that voluntary reporting is related to real effects on corporate investment, answering a long-standing call in academic literature to trace how information flows shape capital allocation.

For the profession, that finding challenges the old assumption that regulatory and investor scrutiny around non-GAAP metrics is purely protective. Instead, transparency, consistency and context can transform these metrics into decision-useful tools — not just for investors, but for the companies making the biggest strategic bets.