No. 69: When GAAP Tightens, Non-GAAP Loosens: Evidence from Material GAAP Restatements

Abstract

Prior research suggests that tightening non-GAAP discretion may prompt firms to shift toward more aggressive GAAP reporting (Guggenmos et al. [2022]). In contrast, we examine the reverse: Does tightening GAAP discretion associate with more aggressive non-GAAP disclosures? Using firm-specific GAAP shocks—namely, material restatements that are known to constrain GAAP discretion—we document a shift toward more aggressive non-GAAP reporting. Notably, the decrease in exclusion quality occurs under heightened auditor scrutiny, but not under heightened SEC scrutiny, suggesting differential effects of post-restatement oversight. Our findings are consistent with managers adopting more aggressive non-GAAP reporting in response to tightened GAAP discretion. This paper informs regulators, auditors, and standard setters about the potential unintended consequences of limiting GAAP discretion.