Can Short Sellers Constrain Opportunistic Non-GAAP Earnings Reporting?

Prior studies suggest short sellers can monitor and limit financial reporting opportunism in conventional GAAP earnings. In this study, we explore how short sellers are related to the quality of non-GAAP earnings. Results of difference-in-differences estimations indicate short sale pressure significantly mitigates abusive reporting of non-GAAP earnings. Cross-sectional tests suggest short sellers influence the quality of non-GAAP earnings primarily through two channels: (a) increased costs of misreporting and (b) direct monitoring. Our study has strong policy implications for non-GAAP earnings regulations, and contributes to both the literature on earnings management and the policy debates on short sales constraints.