Right on target: Is public disclosure of non-GAAP earnings associated with M&A efficiency?

Abstract

We examine the association between target firms' public non-GAAP earnings disclosures and merger and acquisition (M&A) efficiency. This research question is important, given the widespread use of non-GAAP metrics in M&A valuation and lack of evidence regarding the real effects of non-GAAP disclosure. Public non-GAAP disclosure can enhance bidders' ability to assess a target's core earnings and potential synergy, especially in the earlier stages of due diligence, and enable bidders to make better M&A decisions. We find that target firms' non-GAAP disclosures are associated with greater M&A efficiency, greater synergies, and lower likelihood of post-acquisition goodwill impairment. We also find some evidence that target firms' non-GAAP disclosures are positively related to post-acquisition operating performance. Further, we find modest evidence that the positive relation between non-GAAP disclosures and M&A efficiency is stronger (1) for targets that are more difficult to value, (2) for targets with weaker information environments, and (3) when targets' non-GAAP numbers are of higher quality. Overall, our evidence suggests that non-GAAP disclosures help facilitate efficient resource allocation in M&As and are associated with real effects on corporate investment. Our evidence is potentially relevant to regulators' concerns about the usefulness of non-GAAP metrics.