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

reduce the use of opportunistic special items to meet or beat analysts’ earnings forecasts.
Our results are robust to a variety of alternative research designs, including the use of
different samples, alternative identification of non-GAAP reporting firms, and different
estimation methods to reduce the bias resulting from two-stage regressions and generated

regressors (Chen, Hribar, and Melessa, 2018; Chen, Hribar, and Melessa, 2023).

4. Research Limitations/Implications

By examining how the regulatory change regarding non-GAAP reporting influences
firms’ opportunistic earnings management, our study provides policy insight to regulators
who strive to improve the overall quality of financial reporting. Moreover, this study
corroborates both non-GAAP reporting literature and earnings management literature.

We find that less stringent regulation on non-GAAP disclosure discourages firms from
reporting opportunistic special items. This finding complements the experimental evidence
of Guggenmos et al. (2022), who suggest that increased regulatory attention to non-GAAP
earnings may lead to increased aggressiveness in GAAP earnings.

On the other hand, our study relies on the model of Cain et al. (2020) to measure
opportunistic special items. Their model still likely contains measurement errors, and our
inferences are subject to this limitation.

5. Originality/Contribution

This study contributes to the literature in several respects. First, the prior non-GAAP
literature generally discusses managers’ non-GAAP reporting incentives (Bradshaw and

Sloan, 2002; Doyle et al., 2003; Lougee and Marquardt, 2004) or investigates the quality
of non-GAAP exclusions (Gu and Chen, 2004; Frankel, McVay, and Soliman, 2011).
Different from these studies, we examine how the SEC’s regulation concerning non-
GAAP reporting affects firms’ opportunistic earnings management. Second, we contribute

to the literature by studying the consequences of SEC intervention concerning non-GAAP
reporting. Prior research tends to focus on the impact of Regulation G, which constrains
firms’ non-GAAP disclosure. Limited research examines the effect of C&DIs, another
important regulation that relaxes the stringent restrictions of Regulation G. Although

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