Graduation Year

2026

Date of Submission

4-2026

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

Professor George Batta

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Terms of Use for work posted in Scholarship@Claremont.

Abstract

This paper examines whether the magnitude of the GAAP-to-non-GAAP earnings wedge drives abnormal stock returns around earnings announcements and in the subsequent quarter, with a focus on the technology sector. Using 157,300 firm-quarter observations from U.S. public firms over the period 2000 through 2024, the analysis tests whether the gap between IBES analyst street earnings and Compustat diluted GAAP earnings per share contains information for stock prices beyond the earnings surprise.

The results reveal a consistent pattern of investor underreaction with a critical asymmetry between technology and non-technology firms. For non-technology firms, a larger wedge is associated with significantly lower short-window abnormal returns at announcement — the WEDGE coefficient in the three-day window regression is -0.1000 (t = -4.78) — followed by positive post-announcement drift of 0.1891 (t = 4.01) over the subsequent quarter. For technology firms, the negative announcement effect is effectively neutralized and post-announcement drift is more than double that of non-technology firms, with a total quarterly drift coefficient of 0.4331. A large GAAP-to-non-GAAP wedge in the technology sector functions as a consistent signal of near-term outperformance. Robustness checks using a binary income-increasing indicator and a pre-2010 subsample confirm the direction and significance of the main findings.

The paper contributes to the non-GAAP earnings literature by shifting the unit of analysis from the binary presence of non-GAAP disclosure to the continuous magnitude of the wedge, documenting sector-specific asymmetries in how investors process non-GAAP adjustments, and connecting the non-GAAP literature to the post-earnings announcement drift literature.

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