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The Regulation of Non-GAAP Reporting and Earnings Management: Evidence from the Recognition of
Opportunistic Special Items

The Regulation of Non-GAAP Reporting and Earnings
Management: Evidence from the Recognition of Opportunistic
Special Items

Li-Han Chang, PricewaterhouseCoopers Taiwan
Han-Chung Chen, Department of Accountancy, National Taipei University
Kai-Wen Cheng, Department of Accounting, National Taiwan University
Chih-Hsien Liao, Department of Accounting, National Taiwan University

1. Purpose/Objective

A growing number of firms have been disclosing non-GAAP earnings (also known as
pro forma or core earnings) in their earnings announcements or financial reports (Black,

Christensen, Ciesielski, and Whipple, 2021). A non-GAAP earnings metric typically
excludes one-time, nonrecurring items (e.g., mergers and acquisition costs, restructuring
charges, and tax resolutions) that do not stem from the firm’s core operations. Managers
often make such adjustments when they consider non-GAAP earnings more representative

of the firm’s operating performance.
Past literature suggests that both opportunistic and informative incentives can
influence managers’ non-GAAP reporting behavior. The informative perspective suggests
that non-GAAP earnings more closely represent permanent earnings and better predict

the firm’s future performance (Bhattacharya, Black, Christensen, and Larson, 2003;
Brown and Sivakumar, 2003); investors also consider non-GAAP earnings more value-
relevant than GAAP earnings (Bradshaw and Sloan, 2002; Lougee and Marquardt, 2004).
However, the opportunistic perspective argues that managers likely disclose non-GAAP

earnings for strategic reasons. For example, Doyle, Lundholm, and Soliman (2003) find
that items excluded from non-GAAP earnings are largely recurring expenses, suggesting
that managers attempt to present a more favorable performance metric that could mislead
investors. Other studies also document that non-GAAP exclusions allow managers to

meet earnings benchmarks that they would not reach based on GAAP earnings (Black and
Christensen, 2009; Doyle, Jennings, and Soliman, 2013).
In response to concerns regarding the misuse of non-GAAP earnings figures, the

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