Can Short Sellers Constrain Opportunistic Non-GAAP Reporting?

Prior research finds an association between short selling volume and aggressive non-GAAPearnings disclosures but does not explore whether increased short selling pressure actuallyconstrains 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, andthey also decide the timing of these disclosures strategically. Furthermore, short sellers carefullyselect the stocks they want to short. We exploit a randomized natural experiment—the SEC’sRegulation SHO—as an exogenous shock to mitigate endogeneity concerns and investigate thecausal effect of short selling on the proliferation of aggressive non-GAAP earnings. The specificstarting 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 sellingprompted by Regulation SHO significantly curbs managers’ aggressive non-GAAP disclosures.However, the regulation does not affect non-GAAP exclusions that are presumed to benonstrategic and informative. We find that short sellers’ disciplining effect is stronger when thepre-disclosure information environment is relatively impoverished and corporate governance isweak. Our results are robust to extensive sensitivity testing. Overall, we find strong evidence thatthe threat of increased short selling constrains aggressive non-GAAP reporting