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

special items. Thus, we formulate our first hypothesis as follows:
H1: Firms reporting non-GAAP earnings reduce the recognition of opportunistic special
items after the SEC’s implementation of C&DIs.

Firms often suffer stock price declines when their financial performance does not
meet analysts’ expectations (McVay, Nagar, and Tang, 2006). The exclusion process
in the reporting of non-GAAP earnings usually allows firms to meet or beat analysts’

forecasts (Doyle and Soliman, 2002). As the C&DIs increase the flexibility of recurring
item exclusions, non-GAAP reporting firms should lower the tendency to meet analysts’
earnings benchmarks through opportunistic special items. Thus, we propose our second
hypothesis as follows:
H2: Firms reporting non-GAAP earnings reduce meeting or beating analysts’ earnings

forecasts through opportunistic special items after the SEC’s implementation of
C&DIs.

2. Design/Methodology/Approach

This study adopts the methodology of Cain et al. (2020) and estimates opportunistic
special items using the following equation:

= + + +
�,� � �,��� � �,���,��� � �,���,���
+ + +
� �,���,��� � �,�,��� � �,�
+ + % + ∆ +
� �,� � �,� � �,���,��� �� �,�
+ +
�� �,��� �� �,���,�
+ + +
�� �,� �� �,��� �� �,���
+ . (1) (1)
�� �,��� �,�

The residuals from equation (1) refers to the special items that cannot be explained by
The residuals from equation (1) refers to the special items that cannot be explained by
economic incentives and are recognized opportunistically by managers (denoted OppSI)
economic incentives and are recognized opportunistically by managers (denoted OppSI)
instead.
instead.
We then estimate the following equation to test our H1:
We then estimate the following equation to test our H1:

=∝ + ∝ +∝ +∝ ×
�,� � � �,� � � � �,� �
222
+∝ +∝ +∝ +∝
� �,� � �,� � �,� � �,�
+∝ + ∝ + . (2)
� �,� � �,� �,�
In equation (2), NonGAAP is an indicator that equals 1 if the firm discloses a non-GAAP
earnings metric in earnings press releases (Bentley, Christensen, Gee, and Whipple, 2018)

and 0 otherwise. Post is an indicator that equals 1 for years after 2010 (inclusive), when the
SEC implemented C&DIs, and 0 otherwise. Our main variable of interest is the interaction
term NonGAAP×Post, and H1 predicts that ∝ <0.
�

To test H2, we estimate the following equation:

= + + + + ×
�
�
�
�,�
�
�,�
�
�,�
�
�,�
+ × + × +
�,�
�
�,�
�
�
�,�
�
× × + �,� + �,� +
�
�
�
�,�

�,�
�
+ + + + �,� +
�,�
��
�,�
��
��
��
�,�
��
�,�
. (3)
�,�
where MBEPCT represents the percentage of quarterly earnings that meets or beats
analysts’ earnings forecasts (actual earnings less analysts’ forecast earnings between 0 and
0.03) during the year. The key test variable in equation (3) is OppSI×NonGAAP×Post.
According to the prediction of H2, we expect that <0.
�
Our sample starts from 55,983 firm-years available in the Compustat database during
2007–2012. After we exclude firms with missing values required to calculate regression
variables, the final sample consists of 29,494 observations for the test of H1 and 17,366
observations for the test of H2.
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