Can Short Sellers Constrain Opportunistic Non-GAAP Reporting?
Forthcoming at Review of Accounting Studies
60 Pages Posted: 31 Jan 2016 Last revised: 21 Jun 2021
Date Written: June 21, 2021
Prior research finds an association between short selling volume and aggressive non-GAAP
earnings disclosures but does not explore whether increased short selling pressure actually
constrains aggressive non-GAAP reporting. Attribution of causality is problematic in this setting,
due to multiple self-selection issues. Firms self-select into providing non-GAAP disclosures, and
they also decide the timing of these disclosures strategically. Furthermore, short sellers carefully
select the stocks they want to short. We exploit a randomized natural experiment—the SEC’s
Regulation SHO—as an exogenous shock to mitigate endogeneity concerns and investigate the
causal effect of short selling on the proliferation of aggressive non-GAAP earnings. The specific
starting and ending dates of Regulation SHO allow us to conduct two separate difference-indifferences (DiD) tests. Our double DiD analyses indicate that the threat of increased short selling
prompted by Regulation SHO significantly curbs managers’ aggressive non-GAAP disclosures.
However, the regulation does not affect non-GAAP exclusions that are presumed to be
nonstrategic and informative. We find that short sellers’ disciplining effect is stronger when the
pre-disclosure information environment is relatively impoverished and corporate governance is
weak. Our results are robust to extensive sensitivity testing. Overall, we find strong evidence that
the threat of increased short selling constrains aggressive non-GAAP reporting.
Keywords: Non-GAAP earnings, short sellers, Regulation SHO, earnings management
JEL Classification: G30, M41, K22
Suggested Citation: Suggested Citation