The Relative and Incremental Information in Alternative (to Earnings) Performance Measures

We analyze the ability of earnings and non-earnings performance metrics to explain stock returns for industries where we identify, ex ante, an allegedly preferred (for valuation purposes) performance metric. We identify three industries each where earnings before interest, taxes, depreciation and amortization (EBITDA) and cash from operations are preferred, and three industries where specific non-GAAP performance metrics are preferred. As a benchmark, we also examine the ability of EBITDA and cash from operations to explain returns for seven industries for which earnings is the preferred metric. Results for the benchmark earnings industries show that earnings dominates EBITDA and cash from operations in explaining security returns. All other results are inconsistent with the view that perceptions of preferred metrics are reflected in actual aggregate investment behaviors.