An Empirical Analysis of Non-Gaap Measures for High Litigation Industries

This paper empirically examines the effects of firms in high litigation-risk industries over the likelihood of non-GAAP reporting and over the difference between management non-GAAP Earnings Per Share (EPS) and GAAP EPS. Results suggest that firms in industries with a high incidence of litigation are more likely to report non-GAAP measures than those in other industries, while the extent of the non-GAAP exclusion per share decreases for high litigation firms. In addition, we investigate the relation between the financial crisis of 2008-2009 and the extent of non-GAAP reporting. Results of these tests show that while the magnitude of non-GAAP exclusions generally increased during the financial crisis, exclusions for high litigation firms were lower relative to other industries. We also conduct a subsample analysis and find that audit quality reduces the magnitude of non-GAAP exclusion for high litigation firms