Implicit Non-GAAP Earnings Guidance

<p><span>Despite the prevalence of analysts' forecasted non-GAAP exclusions well in advance of earnings announcements, how analysts form these expectations absent explicit non-GAAP earnings guidance remains unclear. We examine the prevalence, consequences, and costs and benefits of implicit non-GAAP earnings guidance, a forward-looking disclosure practice that remains largely unaccounted for in the literature. We document that implicit non-GAAP earnings guidance is widespread, comprising 41.7 percent of total (explicit and implicit) non-GAAP earnings guidance issued by S&amp;P 1,500 firms in 2005-2021. We identify implicit non-GAAP earnings guidance through a prevalent disclosure practice: guidance on special items and recurring items (SIRI) that are often not considered part of core earnings in the absence of explicit non-GAAP earnings guidance. To validate this practice as implicit non-GAAP earnings guidance, we document that SIRI guidance, absent explicit non-GAAP earnings guidance, predicts future manager-disclosed and analyst-provided realized (actual) non-GAAP earnings. Our evidence suggests that implicit non-GAAP earnings guidance is informative to investors and that it influences the composition of analysts’ forecasted street earnings (i.e., the non-GAAP exclusions that define what constitutes street earnings). SIRI guidance not only prompts analysts to refine but also to initiate forecasted non-GAAP exclusions. Moreover, we find that implicit non-GAAP earnings guidance reflects a trade-off of potential costs and benefits. Specifically, although analysts discount (i.e., are less responsive to) SIRI guidance when it is not accompanied by explicit non-GAAP earnings guidance, implicit guiders subsequently receive less SEC regulatory non-GAAP scrutiny. Overall, our study directs the attention of academics, practitioners, and regulators to the pervasiveness of implicit non-GAAP earnings guidance and underscores its role in firms’ forward-looking disclosures.</span></p>