Can short sellers constrain aggressive non-GAAP reporting?

Nudge: Pushing earnings management away

“…A partir da variedade de motivações para o gerenciamento de resultados, alguns fatores podem ser considerados úteis no seu processo de redução, dentre eles, a utilização de sistemas para a adequada aplicação das normas, com vistas a detectar e restringir esta prática considerada agressiva (Böcking et al, 2015), e até a forma como as normas sociais são expostas aos tomadores de decisão (Young, 2021). Surpreendentemente, apesar da importância, poucas pesquisas foram desenvolvidas sobre os mecanismos de monitoramento, que podem limitar ou reduzir relatórios agressivos (Bhattacharya et al, 2022).…”

CEO performance‐based grants’ vesting provisions and debt contracts: Evidence from GAAP, Non‐GAAP and KPI metrics

“…E. Christensen et al, 2014), and recent evidence indicates that increased short selling constrains aggressive non-GAAP reporting (Bhattacharya et al, 2022). Because of the increasing popularity of non-GAAP measures among managers, security analysts and investors, and the increasing concern of its potential misuse, the SEC published several recent updates to its interpretive guidance on non-GAAP disclosures (Black et al, , 2023Bradshaw & Sloan, 2002;Regulation G, Section 401(b) of Sarbanes-Oxley-SOX).…”

“…Moreover, prior research indicates that managers use non‐GAAP earnings aggressively to meet analysts’ targets (Bhattacharya et al., 2004; Doyle et al., 2013; Lougee & Marquardt, 2004; McVay, 2006), to mislead investors, and/or to extract rents (Bhattacharya et al., 2007; Black & Christensen, 2009; Graham et al., 2005; Wang, 2014). It is not surprising that short‐sellers view non‐GAAP earnings as signals of low financial reporting quality and future underperformance (T. E. Christensen et al., 2014), and recent evidence indicates that increased short selling constrains aggressive non‐GAAP reporting (Bhattacharya et al., 2022). Because of the increasing popularity of non‐GAAP measures among managers, security analysts and investors, and the increasing concern of its potential misuse, the SEC published several recent updates to its interpretive guidance on non‐GAAP disclosures (Black et al., 2018, 2023; Bradshaw & Sloan, 2002; Regulation G, Section 401(b) of Sarbanes‐Oxley—SOX).…”

Short seller monitoring and real earnings management

“…A strand of literature in this category suggests that short sellers play a role in monitoring and disciplining managers. According to these studies, short‐selling threats curb accruals‐based earnings management (Fang et al., 2016; Massa et al., 2015), constrain aggressive non‐GAAP reporting (Bhattacharya et al., 2022), enhance acquisition performance (Chang et al., 2019), and increase the likelihood of forced CEO turnover (Bennett & Wang, 2018). Studies in this category also examine how the RegSHO pilot program affects other aspects of managers’ decisions, such as those regarding corporate financial policies (e.g., Chen et al., 2019; Francis et al., 2017; Gong, 2020; Grullon et al., 2015; Wang, 2018), internal capital allocation (Albertus et al., 2019), corporate innovation (He & Tian, 2016), labor relations (Brockman et al., 2020), tax aggressiveness (Kim et al., 2020; Maharjan et al., 2020), insider trading (Massa et al., 2015; Wang et al., 2022), executive compensation (Chang et al., 2021; De Angelis et al., 2017; Lin et al., 2019), and management forecast and disclosure (Clinch et al., 2019; Francis et al., 2017; Kubick et al., 2021; Li & Zhang, 2015; Sun & Xu, 2022).…”