Does Non-GAAP Reporting Pay Off?

In the high-stakes world of mergers and acquisitions (M&As), better information can mean billions in value gained or lost for companies.

A new accounting study by Ciao-Wei Chen, associate professor of accountancy at the University of Illinois Urbana-Champaign, and co-authors Frank Heflin (University of Georgia), Patrick W. Ryu (University of Manchester), and Jasmine Wang (University of Virginia), finds that companies that regularly report high-quality non-generally accepted accounting principles (GAAP) information attract more informed bidders and close more successful deals. Their findings also show that voluntary financial disclosures create real economic value—a message with significant implications for certified public accountants (CPAs) who are responsible for, or advise clients on, financial reporting strategies.

WHY NON-GAAP DISCLOSURES MATTER

M&As represent some of the most consequential decisions corporate executives make. As the researchers note in their study, “Right on Target: Is Public Disclosure of Non-GAAP Earnings Associated With M&A Efficiency?” these transactions “reallocate massive amounts of corporate resources and shareholder wealth amid high information asymmetry and agency conflicts.”

To illustrate the amount of resources spent by companies in the past couple of years, global M&A deal value was $3.4 trillion in 2024 and increased to nearly $5 trillion by the end of 2025, according to McKinsey & Company.

Non-GAAP disclosures have become ubiquitous in corporate financial reporting. More than half of all publicly traded firms and approximately 90% of S&P 500 companies now voluntarily report earnings that go beyond what GAAP requires. These disclosures take many forms:

• Adjusted earnings that exclude one-time charges.
• Operating earnings that strip out non-core items.
• Earnings before interest, taxes, depreciation, and amortization.
• Free cash flow calculations.
• Various key performance indicators tailored to specific industries.

But why would potential acquirers care about a target’s public disclosures when they eventually gain access to confidential due diligence materials?

The researchers’ literature provides a clear answer: Prior studies have shown that acquirers download target firms’ United States Securities and Exchange Commission (SEC) filings from the EDGAR database several months before announcing deals. This download activity spikes around their announcement date and continues for months afterward, which demonstrates that bidders actively use publicly available accounting information throughout the acquisition process—from initial target screenings through final valuation and integration planning.

As Chen writes in a January 2026 Accounting Today article, “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.” 

COULD NON-GAAP DISCLOSURES BE MISLEADING?

Of course, not everyone views the proliferation of non-GAAP reporting favorably. The SEC has long worried that these voluntary disclosures could mislead investors, and the agency has issued regulations and interpretive guidance addressing non-GAAP reporting practices. In recent years, non-GAAP disclosures have also ranked among the most frequent topics in SEC comment letters to public companies.

The concern is straightforward: Because non-GAAP disclosures face less regulatory and auditor scrutiny than GAAP financial statements, companies might use them to paint an overly “rosy” picture of their performance.

To address this risk, the SEC requires firms to:

• Reconcile non-GAAP earnings to GAAP earnings.
• Explain the usefulness of the non-GAAP measures.
• Provide rationale for each item excluded in the non-GAAP disclosure.

These requirements make it harder to opportunistically exclude items that acquirers might not anticipate or fully understand.

But as Chen notes in Accounting Today, the study reinforces the point that regulators have long emphasized: “Non-GAAP reporting isn’t inherently problematic; poor non-GAAP reporting is.”

HOW THE RESEARCHERS CONDUCTED THEIR ANALYSIS

To examine whether non-GAAP disclosures affect M&A outcomes, Chen and his co-authors analyzed 669 completed deals announced between 2005-2016, each involving transactions exceeding $1 million. The average transaction value in their sample was $1.7 billion, and aggregate deal value in their sample totaled approximately $1.14 trillion, representing a substantial cross section of the M&A market.

The researchers measured M&A efficiency primarily through the bidder’s five-day cumulative abnormal return (CAR), a frequently used measure in accounting and finance research, capturing how a company’s stock performs relative to expected returns based on overall market movements. When an acquiring firm announces a deal that investors perceive as value-creating, the bidder’s stock typically rises at the announcement date, producing a positive CAR. On the other hand, deals viewed as overpayments or poor strategic fits generate negative CAR. By examining stock prices in a narrow five-day window around the announcement, researchers can isolate the market’s assessment of deal quality from other factors affecting those prices.

The researchers measured how often target firms made non-GAAP disclosures in earnings announcements during the eight quarters before the deal. As part of this, they controlled for numerous factors that prior research says could influence deal outcomes, including bidder and target size, profitability, leverage, and other deal characteristics such as payment method and whether the transaction was a tender offer.

THE RESULTS: BETTER DISCLOSURES, BETTER DEALS

The findings strongly support the value of non-GAAP disclosures. As Chen explains in Accounting Today, “[A]cquirers’ 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.”

So, why do non-GAAP disclosures help? To understand this, the researchers conducted additional tests and found weak evidence that recurring exclusions (items like amortization and stock-based compensation that appear each year) drive the positive relationship more than one-time special items. This makes intuitive sense: Recurring exclusions are often not separately disclosed elsewhere in financial statements, making them harder for acquirers to identify and adjust for without the firm-specific knowledge that non-GAAP disclosures provide.

The benefits also extended beyond short-term market reactions. Increased non-GAAP disclosure frequency was associated with greater deal synergies and fewer post-acquisition goodwill impairments. This is a meaningful finding given that goodwill write-downs often signal acquisition failures.

Additionally, the researchers found weaker but supportive evidence linking target non-GAAP disclosures to better operating performances in the first three years following an acquisition.

Perhaps the most intriguing finding was that firms who disclosed non-GAAP earnings more frequently were also more likely to become acquisition targets in the first place. This suggests that non- GAAP disclosures reduce information uncertainty, making firms more attractive candidates during acquirers’ initial screening processes.

Finally, cross-sectional analyses revealed that non-GAAP disclosures mattered most when targets were harder to value— for example, when they exhibited high return volatility or used more uncertainty-related language in their 10-K filings. Similarly, the disclosures proved more valuable when targets had weaker information environments, such as limited analyst coverage or lower stock liquidity. These patterns show that non-GAAP reporting could serve to fill genuine information gaps.

IMPLICATIONS FOR CPAs

For CPAs in industry or advising corporate clients, this research carries practical implications. First, it provides evidence-based support for investing in high-quality non-GAAP disclosures. Companies contemplating eventual sales or those simply wanting to maximize their appeal to potential acquirers should view thoughtful non-GAAP reporting as more than a communication exercise. These disclosures can directly influence deal opportunities, outcomes, and valuations.

Second, the researchers’ findings highlight that quality matters. Higher-quality non-GAAP disclosures (i.e., those aligned with analyst expectations and not flagged in SEC comment letters) created genuine value and drove stronger results.

Further, this study contributes to the broader debate about non- GAAP regulation. While concerns about potential misuse are legitimate, this research demonstrates that non-GAAP disclosures can facilitate efficient capital allocation in one of the economy’s most important markets. That evidence should factor into any regulatory cost-benefit analysis.

In an era when voluntary disclosure decisions increasingly shape how companies are perceived and valued, this research confirms what many practitioners have long suspected: clear, informative financial communication pays dividends—sometimes quite literally.