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NTU Management Review Vol. 34 No. 2 Aug. 2024

Bond, Czernkowski, Lee, and Loyeung (2017) examine the impact of both Regulation G
and C&DIs, they focus on how these regulatory interventions affect firms’ “exclusion”
behavior, which is different from our focus on the “recognition” behavior. Third, our
study adds to the stream of research discussing firms’ strategic reporting of special items.

Prior literature documents that investors, analysts, and compensation committees tend to
discount income-decreasing special items in assessing firm performance or determining
managerial compensation (Curtis, Li, and Patrick, 2021; Dechow, Huson, and Sloan, 1994;

Gaver and Gaver, 1998). The SEC has also devoted its regulatory attention to recurring
items, making special items a convenient tool for earnings management. Our findings
further suggest that the reduced regulatory scrutiny of recurring item exclusion can
mitigate firms’ opportunistic earnings management through special item recognition. This
highlights the importance of distinguishing opportunistic special items from economically

driven special items.

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