No. 215: Non-GAAP Disclosure Credibility

Managers provide voluntary non-GAAP adjustments alongside GAAP earnings to reveal economic performance that GAAP conservatism otherwise leaves understated. Such disclosure faces a credibility problem: Regulation~G imposes no definitional standard, leaving managers with broad discretion over which items to exclude. Absent external discipline, managers cannot convince investors that they are not inflating performance. I show that when credibility is sustained by institutional discipline that scales with materiality, a partial-pooling equilibrium obtains: managers credibly disclose material adjustments, while withholding immaterial news when credibility is too low to convince investors. In this framework, conservative GAAP and informative non-GAAP earnings are complements: pushing GAAP toward fair value reduces the information content that sustains non-GAAP credibility. Banning non-GAAP without strengthening GAAP or enforcement eliminates the channel through which managers communicate information that conservative GAAP does not recognize.