We explore how product market competition affects managers’ use of non-GAAP earnings to signal financial performance. Using hand-collected data for large European firms, we find that the non-GAAP earnings signal conveyed by managers (i.e. the difference between non-GAAP and GAAP earnings) is higher when competition is strong. Moreover, we show that in strong competitive environments firms with low GAAP performance increase less their non-GAAP earnings signal than firms with high GAAP performance. Low performing firms continue to experience below industry performance in subsequent periods, thus the non-GAAP signal appear to be consistent with their expected weak future performance. These findings are in line with a signaling cost argument; industry competition can restrain aggressive non-GAAP reporting as false signals about current and future earnings performance may induce the entrance of new competitors or overproduction by existing ones, reducing the firm’s low income even further.

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Non-GAAP,Product market competition,Industry effects,Signaling