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

See all articles by Neil Bhattacharya

Neil Bhattacharya

Singapore Management University - School of Accountancy; Southern Methodist University (SMU) - Accounting Department

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Qunfeng Liao

Oakland University-Department of Accounting and Finance

Bo Ouyang

Pennsylvania State University Great Valley

Date Written: June 21, 2021

Abstract

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

Bhattacharya, Neil and Christensen, Theodore E. and Liao, Qunfeng and Ouyang, Bo, Can Short Sellers Constrain Opportunistic Non-GAAP Reporting? (June 21, 2021). Forthcoming at Review of Accounting Studies, Available at SSRN: https://ssrn.com/abstract=2724935 or http://dx.doi.org/10.2139/ssrn.2724935

Neil Bhattacharya

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3082 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://www.cox.smu.edu

Theodore E. Christensen (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Qunfeng Liao

Oakland University-Department of Accounting and Finance ( email )

275 Varner Drive
Rochester, MI 48309-4485
United States
248-370-4289 (Phone)

Bo Ouyang

Pennsylvania State University Great Valley ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
6106483371 (Phone)

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