Non-GAAP Reporting and Accounting Restatement

Shin-Rong Shiah-Hou
Yuan Ze University

Abstract
In this study, I examine whether disclosing Non-GAAP earnings is a signal of
experiencing accounting restatement. I propose a scenario in which earnings are
managed within the constraints of GAAP guidelines, as long as there is sufficient
leeway to permit income-increasing accounting choices. Managers usually avoid
issuing Non-GAAP earnings because of severe penalties. If this becomes no longer
possible within GAAP earning management, managers have incentives to cross the
line into Non-GAAP territory. At this point, disclosing Non-GAAP earnings is
positively associated with accounting restatement because of the great magnitude of
earnings management. I find that firms with restatements experience a significant
increase in the relative use of disclosing Non-GAAP earnings with positive other
exclusions. Firms with the positive other exclusions excluded from Non-GAAP
earnings may exhibit increased likelihood of fraud or core-earnings restatement.
Finally, firms disclosing Non-GAAP earnings and having high accounting complexity
are more likely to restate than those disclosing Non-GAAP earnings and having low
accounting complexity.

Key Words: Non-GAAP Earnings, Accounting Restatement, Accounting Complexity

JEL: M42, G30

* Corresponding Author, Associate Professor, Department of Finance, College of

Management, Yuan Ze University, Taoyuan 32003, Taiwan, Tel: +886-3-4638800 (ext.
2663); Fax:886-3-4630377; e-mail: fnshiah@saturn.yzu.edu.tw

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1. Introduction

Managers have incentives to meet or beat specific performance goals, both internal
and external. There are two approaches, using earnings management or disclosing
Non-GAAP earnings, to arrive at the performance benchmark. The effect of using
earnings management appears directly in the GAAP earnings, while disclosing
Non-GAAP earnings can only affect investors’ perceptions. Hence, managers desire to
flexibly use discretionary accruals within GAAP guidelines to manipulate earnings
and achieve their goals. If there is little difference between performance and
accounting targets, aggressive manipulation is unnecessary and effects of prior
earnings management may easily be reversed. However, if economic performance
does not improve sufficiently, additional manipulation is necessary, including the use
of accounting options that can be rationalized under grey areas of GAAP, such as
reducing reserve estimates or capitalizing marginal expenses over time. Managers
must use Non-GAAP earnings to meet specific goals (Bhattacharya et al. 2004; Doyle
et al., 2013; Doyle and Soliman, 2005; Lougee and Marquardt, 2004), when they
eventually exhaust the above aggressive manipulations within GAAP discretion. Thus,
firms can have large accumulated discretionary accruals which cause the balance
sheet and income statements to become bloated when they disclose Non-GAAP
earnings, consistent with the opportunistic use of non-GAAP earnings numbers. Most
earnings restatements are related to accounting errors, or misunderstandings of GAAP,
but many of these restatements are instead due to intentional earnings management. If
the above scenarios are correct, I expect that accounting restatements will correspond
with disclosure of Non-GAAP earnings.

Palmrose and Scholz (2004) examine the circumstances of non-GAAP financial

reporting by 492 U.S. companies that announced restatements from 1995 to 1999.
They find that 62 percent of the sample experience core restatements. Ettredge et al.
(2010) analyze unusually high levels of working capital account balances associated
with income-increasing earnings management prior to initial non-GAAP financial
reports. Based on this argument, they conclude that firms with higher bloat in their
financial statements over the years prior to issuance of the first non-GAAP financial
reports are more likely to restate. However, Palmrose and Scholz (2004) do not
consider cases after Regulation G of SOX 1, while Ettredge et al. do not consider the
direct effect of Non-GAAP disclosure on restatement.

1
To improve the informativeness of non-GAAP earnings, the SEC issued Regulation G, which
requires that public companies reporting non-GAAP earnings provide the direct adjustments and a
reconciliation table to illustrate the differences between GAAP and non-GAAP earnings. In addition,
managers should provide evidence showing why the non-GAAP measure is useful to investors. Reg G
took effect on March 28, 2003.
1

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 Essentially, the ongoing debate about disclosure of Non-GAAP earnings focuses on
whether managers disclose Non-GAAP earnings to inform or mislead. 2 If exclusions
from GAAP earnings to arrive at Non-GAAP earnings belong to nonrecurring items,
Non-GAAP earnings are more representative of ‘‘core earnings’’ than GAAP earnings.
Managers then claim that Non-GAAP earnings can help investors in assessing the
firm’s core operating performance. Based on this situation, adjustments of
Non-GAAP earnings are not related to grey areas of GAAP, and then independent of
the restatement. Non-GAAP earnings are associated with accounting restatement only
when there are inappropriate exclusions that should belong to recurring items.
Ettredge et al. (2010) do not discuss this issue at all. In this paper, I address this
question more directly by examining the effect of exclusions from Non-GAAP
earnings on accounting restatement. Consistent with previous research (Doyle et al.,
2003; Doyle et al., 2013; Kolev et al., 2008), I decompose total exclusions from
Non-GAAP earnings into special items and other exclusions. I define special items as
those that are more transitory3 and other exclusions as those for which it is unclear
whether they are nonrecurring or recurring items 4. Positive values of exclusions
indicate that expenses result in income decreases are excluded from GAAP
earnings, while negative values of exclusions indicate that revenues result in
income increases are excluded from GAAP earnings.

Taken together, I propose a scenario in which earnings are managed within the
constraints of GAAP guidelines, as long as there is sufficient leeway to permit
income-increasing accounting choices. Managers usually avoid issuing Non-GAAP
earnings because of severe penalties. If this is no longer possible within GAAP
earning management, managers have incentives to cross the line into Non-GAAP
territory. At this point, disclosing Non-GAAP earnings is positively associated with
accounting restatement because of the great magnitude of earnings management. I
predict that firms which disclose Non-GAAP earnings that excluded positive other
exclusions are more likely to restate. Our primary sample comprises S&P 1500 firms
that have experienced restatement during 2004-2012 (1,575 firm-year observations),
while there are 1,529 firm-year observations for matching firms without restatement
over the same time period. I find evidence that firms disclosing Non-GAAP earnings
with positive other exclusions are more likely to experience restatement, consistent

2
Research finds that these non-GAAP earnings numbers are, on average, more informative than
GAAP earnings (Bradshaw and Sloan, 2002; Bhattacharya et al., 2003; Frankel and Roychowdhury,
2005), but there is also evidence of opportunism.
3
The ‘‘appropriate’’ items are excluded from Non-GAAP earnings.
4
The ‘‘inappropriate’’ items are excluded from Non-GAAP earnings.
2

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with my prediction.

Previous studies decompose restatement into two categories: (1) intentional

misstatement: violation of GAAP was identified as fraudulent; or misclassifications of
core items such as revenue, cost of sales, or recurrent costs; (2) intentional
misstatement (Hennes et al., 2008; Palmrose et al., 2004; Palmrose and Scholz, 2004;
Scholz, 2008): the revision of non-core items was identified as error. The former is
related to earnings manipulation, while the latter is not. Following the characteristics
of other exclusions, I predict that firms that disclose Non-GAAP earnings with
positive other exclusions are more likely to be involved in fraud or core misstatement.
Consistent with my prediction, the evidence shows a positive association between
disclosure of Non-GAAP earnings with positive exclusions and the likelihood of fraud
and core-items misstatement, but no association with the likelihood of non-core items
misstatement (error). These results can further confirm the importance of positive
other exclusions when forming restatements.

The U.S. Chamber of Commerce, the Securities and Exchange Commission (SEC),
and the Financial Accounting Standards Board (FASB) have each identified
accounting complexity is a major reason for accounting restatement. Empirical results
(Ciesielski and Weirich, 2006; Plumlee and Yohn, 2010) similarly find that accounting
complexity can affect the possibility of accounting restatement. I further explore
whether accounting complexity, defined as the accounting policy length, affects my
hypotheses. For firms with high accounting complexity, disclosure of Non-GAAP
earnings with positive other items increases the likelihood of restatement. However,
regardless of their disclosure of Non-GAAP figures, firms with high accounting
complexity are more likely to experience restating, consistent with Peterson (2012).

This paper contributes to both the Non-GAAP earnings and accounting restatement
literatures. Although the causes and consequences of accounting restatements
(Amel-Zadeh et al., 2015; Desai et al., 2006; Ettredge et al., 2010; Ettredge et al.,
2013; Huang and Scholz, 2012; Palmrose et al., 2004; Scholz, 2008; Srinivasan, 2005)
and Non-GAAP earnings disclosure (Bhattacharya et al., 2003; Brown and Sivakumar,
2003; Doyle et al., 2013; Guillamon-Saorin et al., 2017; Jennings and Marques, 2011;
Kolve et al., 2008) are well studied, few published studies examine how Non-GAAP
earnings disclosure affect the likelihood of restatements. Although Ettredge et al.
(2010) use a sample with Non-GAAP earnings disclosure to investigate the effect of
bloated financial statements on accounting restatement, they do not show a direct
relationship between Non-GAAP earnings disclosure and restatement. Next, to our

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knowledge, this is the first study to directly examine the impact of Non-GAAP
earnings with different types of exclusions on the accounting restatement. I contribute
to the Non-GAAP earnings literature in a new arena: the relationship between
exclusions and restatement. Third, Regulation G of SOX increases the
informativeness of Non-GAAP earnings, while various groups have posited plausible
reasons for restatements including accounting complexity and application of SOX
Section 404 requirements. Therefore, I use the sample after SOX to illustrate the
relationship between Non-GAAP earnings and restatement.

2. Background and Hypotheses

To understand my hypotheses, it is important to understand the process by which

Non-GAAP earnings are generated. I provide five stages in this iterative process.

Stage 1: Firms usually have internal and external pressure to meet a specific earnings
target. For internal objectives, since executive compensation and stock options are
aligned with performance targets (Indjejikian et al., 2014), managers place great
importance on this benchmark. For external objectives, managers have incentives to
meet or beat the analyst’s forecasts (Abarbanell and Lehavy, 2003; Burgstahler and
Eames, 2006; Doyle et al., 2013). To meet the target, managers can use accruals
manipulations and real activities manipulation to affect GAAP earnings, or use
disclosure of Non-GAAP earnings to change investors’ perceptions. Managers need to
adjust accruals or real activities to engage in earnings management from time to time,
while they make the decision on disclosure of Non-GAAP earnings only before
earnings announcements.

Stage 2: Managers usually avoid issuing non-GAAP earnings because of severe

penalties including negative market reactions, increased legal, regulatory, and debt
costs for companies, and job loss for executive officers (Desai et al., 2006; Geiger and
North, 2006; Hennes et al., 2008; Palmrose et al., 2004; Palmrose and Scholz, 2004;
Park and Wu, 2009). Managers should review how much the GAAP earnings differ
from the internal and external earnings targets. If this difference is small, and if
economic performance will soon reconcile actual to the targets, further manipulation
is unnecessary, and providing Non-GAAP earnings is also unnecessary. If this
difference is great, and if economic performance does not improve sufficiently,
managers will only use the Non-GAAP earnings to meet earnings benchmark. At this
point, managers provide Non-GAAP earnings to change investors’ perceptions when
they eventually exhaust manipulations within GAAP discretion. If this scenario is
correct, disclosing Non-GAAP earnings is positively associated with accounting
4

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restatement because of the large magnitude of earnings management. Thus, I
hypothesize:

H1: Firms disclosing Non-GAAP earnings are more likely to have accounting
restatement in the corresponding periods than companies that do not provide
Non-GAAP earnings.

Stage3: For many firms, the existence of upcoming unusual items is publicly
unknown well before the earnings announcement. Following Gu and Chen (2004), the
existence of many exclusions are anticipated before the earnings announcement but
the exact amount of the exclusions is generally not known by outsiders including
analysts, institutional investors, potential outside investors, and databank tracking
services (I/B/E/S, First Call, Zacks) because managers generally do not give much
specific quantitative guidance on exclusions before the earnings announcement
(Doyle et al., 2013). These items can be excluded from GAAP earnings to arrive at
Non-GAAP earnings. Non-GAAP earnings are thus ad hoc and self-serving for
managers.

Stage4: At this point of Stage 3, if managers’ predicted GAAP earnings which have
been exhaustively manipulated within GAAP discretion and earnings benchmarks are
quite difficult to meet, managers have incentives to provide Non-GAAP earnings.
Managers can exclude some occurred and upcoming special items that are typically
viewed as nonrecurring by financial statements users, and then obtain Non-GAAP
earnings. These nonrecurring special items are not associated with restatement, since
these are less likely to be associated with earnings management and misleading
impressions. However, these nonrecurring items have been included in some earnings
benchmarks. For example, analysts who are generally aware of the existence of
potential unusual items decide to exclude special items in their earnings forecasts,
based on their individual judgment and past consensus treatment (Doyle et al., 2013).
Thus, Non-GAAP earnings only excluded special items that are unable to meet the
benchmark. Given this scenario, I predict that the managers will choose to either (1)
opportunistically increase the amount of excluded expenses in order to meet or beat
the earnings benchmark and/or (2) artificially create a new type of exclusion that
increases Non-GAAP earnings. These exclusions are more likely to be recurring
expenses, called other exclusions. Following the previous deduction, most of the
opportunistic behavior appears in other exclusions. Thus, I hypothesize H2:

H2: The positive other exclusions (recurring expenses) excluded from Non-GAAP

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 earnings can increase the likelihood of restatement.

Restatements are divided into two groups: corrections of intentional misstatements,

for which the GAAP violation is identified as fraudulent, and corrections of
non-fraudulent misstatements (Hennes et al., 2008; Palmrose and Scholz, 2004;
Palmrose et al., 2004; Scholz, 2008). However, among non-fraudulent misstatements,
there are cases associated with earnings manipulation. Ettredge et al. (2010) suggest
that misreports of core earnings, such as revenues, cost of goods sold, and selling,
general, and administrative expenses, are more likely to belong to earnings
manipulation. These items that are important to financial statement users are usually
managed by managers to affect investor perceptions. Thus, Ettredge et al. (2010)
divide restatements into three types: Fraud, Core-Earnings Misstatement, and
Non-Core-Earnings Misstatement. Therefore, when firms eventually exhaust all
opportunities for exercising discretionary accruals under grey areas of GAAP, firms
exclude only other exclusions, such as cost of goods sold and selling, general, and
administrative expenses, from GAAP earnings to arrive at Non-GAAP earnings to
meet their targets. These firms are more likely to have fraud or core-earnings
restatement. Thus, I hypothesize H3:

H3: Firms with the positive other exclusions (recurring expenses) excluded from
Non-GAAP earnings can increase the likelihood of fraud or core-earnings
restatement.

Accounting complexity can be costly to financial markets because financial

statement complexity represents the increased difficulty in understanding, interpreting,
and forecasting financial statements (Filzen and Peterson, 2015). Therefore, Peterson
(2012) 5 suggests that accounting complexity leads to restatements because
complexity can allow managers to opportunistically manage earnings (the
manipulation theory). In addition, managers can manage analysts’ expectations, use
specific items excluded from analysts’ actual or “street” earnings, or manipulate
earnings through accruals and real activities to influence their likelihood of meeting
profit target. Filzen and Peterson (2015) find that firms with more complex financial
statements are more likely to meet or beat analysts’ expectations through using
accrual management than firms with less complex statements. Following Peterson
(2012) and Filzen and Peterson (2015), firms with more accounting complex can

5
Complexity could lead to misreporting in two distinct ways. First, complexity from the preparer’s
perspective could cause mistakes in financial reporting (the mistake theory), with more complexity
leading to more errors and misreporting. Second, in contrast to the mistake theory, the manipulation
theory contends that complexity creates uncertainty for investors (or information intermediaries).
6

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influence analysts’ forecasting and use discretionary accruals to meet profit targets.
Managers likely avoid issuing Non-GAAP reports because of severe penalties after
inappropriate Non-GAAP numbers are detected. Thus, firms choose to provide
Non-GAAP earnings to affect investors’ perceptions only when those eventually
exhaust opportunities for exercise within GAAP discretion. At this point, firms with
more complexity find it easier to use leeway available within earnings management as
long as such flexibility exists, than firms with less complexity. Thus, announcing
Non-GAAP earnings for firms with more accounting complexity signals a large
magnitude of earnings management. I thus hypothesize:

H4a: The contemporaneous association between disclosing Non-GAAP earnings

and restatement is stronger for firms with more accounting complexity than
for those with less accounting complexity.

Furthermore, following the deduction of H2, the manager will choose to either
opportunistically increase the amount of excluded expenses and/or artificially create a
new type of exclusion to arrive at Non-GAAP earnings, while Non-GAAP earnings
only excluded special items are unable to meet the benchmark. These items belong to
other exclusions. I then hypothesize:

H4b: The contemporaneous association between disclosing Non-GAAP earnings

with positive other exclusions and restatement is stronger for firms with
more accounting complexity than for those with less accounting complexity.

3. Measurement and Sample

3.1 Sample Selection

My test sample consists of S&P 1500 firms with misstatements of financial reports
during the period January 1, 2004 through December 31, 2013. Financial industries
with SIC codes between 6000 and 6999 are excluded. I use Audit Analytics to identify
the quarterly restatement sample. In order to achieve a balance between a
comprehensive set of restatements and the power of the tests, I include all
restatements for S&P 1500 firms with available data in the sample and then separately
investigate the restatements that I refer to as material restatements, i.e., those
classified as accounting irregularities or frauds by Hennes et al. (2008), versus all
other restatements. Next, I collect our sample of Non-GAAP earnings press releases
from LexisNexis specifically, the PR Newswire and Business Wire for the years
2004-2013. I review these firms’ quarterly press releases from the Lexis-Nexis news

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database, and identify whether the managers disclose their Non-GAAP earnings with
reconciliation from Form 8-k. This enables direct comparison of Non-GAAP earnings
with GAAP earnings. I obtain other data from the following sources: Quarterly
Compustat (for financial statement variables), and the Center for Research in Security
Prices (CRSP) (for stock price information).

This study investigates the effect of disclosing Non-GAAP earnings on restatement.

Thus, Non-GAAP earnings and restatement must occur over the corresponding fiscal
quarterly period. For S&P 1500 firms, there are 1,690 firm-quarter observations to
restate, while there are 6,862 firm-quarter observations to disclose Non-GAAP
earnings. Almost 25% of restatement sample disclose Non-GAAP earnings over the
corresponding fiscal quarterly period. 6

Similar to Desai et al. (2006) and Collins et al. (2009), I use a matched-pair design
to conduct my analyses. I then use S&P 1500 firms to generate a control sample,
matching each of the 1,690 observations remaining in the restatement with a firm that
did not make financial restatements over 2004 to 2013 7 to control firms based on
restatement year, two-digit similar size (total assets), industry (2-digit SIC codes),
firm age, and quarter (using the fiscal quarter of the accounting misstatement for
treatment firms). I require that the ratio of restatement firm total assets to control firm
total assets be between 50 percent and 150 percent and that the difference in age
between the restatement firm and the control firm be two years or less (Desai et al.,
2006). In addition, a control firm cannot be used as a matching firm more than twice
in the same fiscal quarter. My final sample consists of 3,175 firm-quarter observations
(1,602 treatment observations and 1,573 control observations).

3.2 Non-GAAP Exclusions

I calculate total Non-GAAP exclusions as Non-GAAP earnings less GAAP
earnings disclosed by 8-k report. Following Doyle et al. (2003) and Kolev et al.
(2008), I decompose total non-GAAP exclusions into special items and other
exclusions. I focus on the analysis of other exclusions, defined below.

Other Exclusions
Other exclusions are defined as total Non-GAAP exclusions less special items.

6
The sample of firms disclosing Non-GAAP earnings and restatement over the corresponding fiscal
quarterly period has 418 firm-quarter observations.
7
For S&P 1500 firms, after removing financial firms, there are 13,413 firm-quarter observations
without restatement over 2004 to 2013.
8

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Compustat defines material nonrecurring items that are reported above the line as
‘‘special items’’ (quarterly data item SPIQ) and includes a variety of transactions
ranging from one-time gains and losses associated with asset dispositions to expenses
associated with restructurings, plant closings, and asset impairments. Therefore, I use
quarterly data item SPIQ from Compustat divided by outstanding shares to proxy for
Special Items. Thus, other exclusions are items that management has excluded from
GAAP earnings and that have not been flagged by Compustat as non-recurring items.
These other exclusions tend to behave as if they are recurring operating expenses that
management has strategically excluded from GAAP earnings since they are
apparently non-recurring and transitory (Doyle et al., 2013).

3.3 Types of Restatements

I follow Ettredge et al. (2010) and Palmrose and Scholz (2004) in identifying
explicit frauds and distinguishing between misreporting of core and non-core earnings.
Restatements associated with criminal indictments of the company or its officers are
classified as frauds. I include frauds, for which the company uses terms such as
‘fraudulent’ in the Audit Analytics database. Of the firm-quarter observations, 71 are
classified as frauds. Misstatements of items involving revenue, cost of sales, or
recurring operating expenses (core accounts) are the most likely associated with
managers manipulating earnings. Misstatements of other non-core accounts are more
likely to be the result of unintentional errors. Based on the above classification, 491 of
the firm-quarter observations are misstatements of core accounts and 1,040 are
misstatements of non-core accounts. Because fraud and misstatements of core
accounts relate to earnings manipulations, these are grouped into intentional
manipulation. Misstatements of other non-core accounts are grouped into
unintentional manipulation.

3.4 Accounting Complexity

Following Filzen and Peterson (2015), I use a measure of abnormal length of a
firm’s accounting policies disclosure included in the notes to the financial statements
to proxy for financial statement complexity. I calculate the number of words in the
accounting policies disclosure found in the notes to the financial statements in the
10-K. I exclude observations for which the accounting policy length was less than 200
words or greater than 80 percent of the 10-K length. I partition our sample into two
subsamples: (1) High Accounting Complexity: if the accounting policy length is
above the industry median, (2) Low Accounting Complexity: if the accounting policy

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length is below the industry median. 8

3.5 Control Variables

Other model variables control for factors associated with misreported results in
prior research. The primary underlying rationale for selecting these control variables
is that firms that are more likely to engage in earnings management are also more
likely to issue accounting restatements (Ettredge et al., 2010; Irani et al., 2015;
Richardson et al. 2002). Thus, I include a control variable, discretionary accruals
(DAC) generated from modified version of the Jones model (Dechow et al., 1995), to
proxy for earnings management. Following Ettredge et al. (2010), I also expect a
pattern of systematically increasing discretionary accruals for firms later restating
their financial reports. Thus, I adopt the DAC prior fiscal year t-1. Richardson et al.
(2002) compare restatement with non-restatement firms and find that restatement
firms attract significantly more external financing. Thus, I include external financing
activities (FINANCE) 9 as a control variable. Research suggests that the pressure
generated from debt agreements containing accounting-based covenants provides
managers with incentives to reduce their likelihood of violating cash flows through
using discretionary accrual adjustments (Dechow and Skinner 2000; Dichev and
Skinner 2002; Richardson et al. 2002). Thus, managers with high outstanding levels
of debt have greater incentives to engage in earnings management that may result in
restatements. Therefore, I include leverage (LEV, total debt/total assets) as a control
variable. I expect leverage to be positively associated with the likelihood of
restatement. I also control for firm size (SIZE, log of market value of equity). I do not
predict the direction of the association with firm size. 10

Higher growth firms may be more likely to misreport because of more pressure to
manipulate earnings to meet certain growth targets. Richardson et al. (2002) find that
earnings price and book-to-market ratios are negatively associated with restatements.
Thus, I control book-to-market ratios (BM, book value of equity/market value of
equity) and earnings price ratio (EP, EPS/ fiscal year-end stock price), which are
negatively associated with restatement. I also control sales growth rate
(SALE_GROWTH, percentage change in sales from quarter q of the previous fiscal
year to the quarter q of the current fiscal year), which is positively associated with

8
I calculate the industry median value of the number of words in the accounting policies disclosure
with the same 2 digit SIC codes for all S&P 1500 firms using year-by-year annual data.
9
This equals 1 if cash from operations less average of previous three years capital expenditures scaled
by the previous period’s current assets is less than -0.5, and 0 otherwise. This definition is the same as
in Ettredge et al. (2010). Similar to DAC, the annual data of FINANCE is used.
10
Larger firms have been associated with the propensity to restate. Conversely, larger firms may be
less likely to restate because of better internal controls.
10

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restatement. Firms with better performance are less likely to restate, since they have
fewer incentives to manipulate earnings (Scholz, 2008). Given this, I include a
performance measure, return on assets (ROA, net income/total assets). Finally, I
control for the occurrence of a merger or acquisition (MA) because merger and
acquisition is one of the most common causes of non-core restatements (Palmrose and
Scholz, 2004).

4. Empirical Results

4.1 Summary Statistics

In Table 1, I report various summary statistics of major control variables for the
sample and control firms. In addition to DAC, all of variables are measured in the
quarter of misstatement. I find that restatement firms have lower profits (lower GAAP
earnings and ROA), more earnings management, smaller size, higher book-to-market
ratio, and lower earnings to price ratio than their control firms. Most results are
consistent with Ettredge et al. (2010) and Romanus et al. (2008).

[Insert Table 1]

Table 2 cross-tabulates the frequency of major variables for the restating and
non-restating firms and provides univariate tests. Restating firms disclosing
Non-GAAP earnings are more likely to exclude positive other expenses (other
exclusions) from GAAP earnings than non-restating firms. Of the 327 restating
observations providing Non-GAAP earnings, 209 (63.9 percent) have positive other
exclusions, compared to 172 (54.6 percent) of their matched non-restating 315
counterparts. This difference in frequencies is statistically significant at 1 percent
level (Chi-square 5.96). These results are consistent with H2a which contends that the
positive other exclusions (recurring expenses) excluded from Non-GAAP earnings
may increase the likelihood of restatement. By contrast, differences in the frequency
of special items (special items defined as SPIQ from Compustat) between restating
and non-restating observations is not significant. In addition, of the 1,552 restating
observations, 782 (50.39 percent) have higher accounting complexity, compared to
538 (35.81 percent) of their matched non-restating 1,502 counterparts. This difference
in frequencies is statistically significant at less than 1 percent level (Chi-square 68.39).
This result is consistent with Peterson (2012), suggesting that accounting complexity
leads to restatement.

[Insert Table 2]

11

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4.2 The Effect of Non-GAAP Earnings on Restatement
4.2.1 Hypothesis 1
For analysis of H1, I estimate the following logistic regression model:

Logit (Re statementq ) = β 0 + β1Disclosureq + β 2 DACt −1 + β 3 FINANCEt + β 4 LEVq + β 5 SIZEq

+ β 6 BM q + β 7 EPq + β8 ROAq + β 9 SALE _ GROWTH q + β10 MAt + e
333333333(1)

I assign the dummy variable Disclosure a value of 1 if the firm provides Non-GAAP
earnings corresponding with announcement of earnings in the fiscal quarter q. Based
on H1, the coefficient of Disclosure (β1) is significantly positive. In either case, cell
‘coefficients’ are typically used to compute odds ratios for the odds of being in
particular cells. These odds are interpreted as giving the likelihood of falling into
specific cells of interest (as opposed to falling into other cells).

Model 1 in Table 3 presents the results. The coefficient of Disclosure (β1=0.1078,

z-statistic=1.16) is positive but not significant, while the odds of restatements for
firms disclosing Non-GAAP earnings is about 1.114 times higher than the odds for
firms with no disclosure of Non-GAAP earnings. Thus, the disclosure of Non-GAAP
earnings is not related to the occurrence of restatement. H1 cannot be supported. This
result has two implications. First, Non-GAAP earnings are informative when
Non-GAAP earnings disclosure does not result in restatement. Some research finds
that these Non-GAAP earnings numbers are, on average, more value-relevant
(Bhattacharya et al. 2003; Bradshaw and Sloan 2002; Frankel and Roychowdhury
2005). Second, the odds ratio for the disclosure of 1.114 indicates that after
controlling for the explanatory variables, the odds of restatement for firms disclosing
Non GAAP earnings is about 1.114 times higher than for firms with no disclosure of
Non GAAP earnings. Therefore, disclosing Non-GAAP earnings may still result in
restatement under certain conditions related to opportunism. For example, Doyle et al.
(2003) find that items excluded from Non-GAAP earnings have predictive ability for
future earnings, cash flows, and abnormal returns, which suggests that these expenses
may, in fact, be recurring. I thus induce H2 associated with the other exclusions
excluded from GAAP earnings to arrive at Non-GAAP earnings.

According to the control variables, the odds ratio for DAC is 1.038, suggesting that
a one percentage point increase in DAC (earnings management) increases the odds of
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restatement by 3.8%. The odds ratio for SIZE is 0.896, suggesting that a one
percentage point increase in firm size decreases the odds of restatement by 10.4%.
The odds ratio for EP (EPS/price) is 0.760, suggesting that a one percentage point
increase in EPS/price decreases the odds of restatement by 24%. The higher EP, the
lower the growth opportunities. This result indicates that firms with more growth
opportunities are more likely to restate. Finally, the odds ratio for ROA is 0.538,
suggesting that a one percentage point increase in ROA decreases the odds of
restatement by 53.8%. Firms with better performance are less likely to restate. The
coefficients of above variables are significant. These results are consistent with
studies exploring accounting restatement.

4.2.2 Hypothesis 2
For analysis of H2, I estimate the following logistic regression model:

Logit(Re statement q ) = g 0 + g 1 Dis _ Otherq + g 2 Dis _ noOtherq + g 3 Positive _ Specialq

+ g 4 DACt −1 + g 5 FINANCEt + g 6 LEVq + g 7 SIZEq + g 8 BM q + g 9 EPq + g 10 ROAq
+ g 11 SALE _ GROWTH q + g 12 MAt + e 333333333( 2 )

In order to analyze the effect of other exclusions, I partition our sample into three
subsamples: (1) disclosing Non-GAAP earnings with positive other exclusions (2)
disclosing Non-GAAP earnings without positive other exclusions (3) no disclosure of
Non-GAAP figures (the control sample). I assign two dummy variables. The dummy
variable Dis_Other has a value of 1 if the firm provides Non-GAAP earnings with
positive other exclusions corresponding with announcement of earnings in the fiscal
quarter q, while the dummy variable Dis_noOther has a value of 1 if the firm provides
Non-GAAP earnings without positive other exclusions. 11 To control for the effect of
special items, I also construct the dummy variable Positive_Special, which has a value
of 1 if the firm has positive special items reported by Compustat. Based on H2, the
coefficient of Dis_Other (g2) is significantly positive.

The Model 2 in Table 3 presents the results. The coefficient of Dis_Other

(g1=0.2374, z-statistic = 2.07) is significant at the 5% level, consistent with H2. Odds
ratios shed light on the economic significance of my results. The odds ratio of 1.268
indicates that, controlling for the explanatory variables, the odds of restatement for
firms disclosing Non-GAAP earnings with positive other exclusions is 1.268 times
higher than the odds of firms with no disclosure of Non-GAAP earnings. The effect is
11
Firms without disclosing Non-GAAP earnings do not have other exclusions.
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substantial. The coefficient of Dis_noOther (g2=-0.1325, z-statistic=-1.02) is negative
but not significant. The odds ratio is 0.876, which implies that disclosing Non-GAAP
earnings without positive other exclusions reduces the odds of the likelihood of
restatement by 12.4%. To compare coefficients, the association between Dis_Other
and restatement is significantly larger than that between Dis_noOther and restatement
(unreported chi-square: 5.04, p=0.0248). Compared to the control firms (with no
disclosure of Non-GAAP earnings), firms with restatements experience a significant
increase in their disclosure of Non-GAAP earnings with positive other exclusions. At
the same time, disclosing Non-GAAP earnings without positive other exclusions
slightly decreases the likelihood of restating. Therefore, the results of Model 2 in
Table 3 are consistent with H2.

The above results have two implications. First, not all of Non-GAAP earnings
disclosing are unrelated to accounting restatements, while reporting Non-GAAP
earnings with positive other exclusions is related to the likelihood of restatement.
Second, Kolev et al. (2008) find the quality of other exclusions remain low even
though the quality improves after SOX. Doyle et al. (2013) find that managers tend to
exclude more expenses from non-GAAP earnings when it is costlier or more difficult
to use accrual earnings management due to balance sheet constraints. If Non-GAAP
earnings only excluded special items that are unable to meet the benchmark, the
manager will choose to either opportunistically increase the amount of excluded
expenses or artificially create a new type of exclusion that increases Non-GAAP
earnings. This activity conveys a signal of manipulating earnings. The results in
Model 2 of Table 3 show this scenario. The results of control variables in Model 2 are
qualitatively and quantitatively very similar to those in Model 1.

[Insert Table 3]

4.2.3 Hypothesis 3
For the analyses of restatement types, I estimate the following multinomial logistic
regression model (3) that distinguishes among (1) fraud and core restatement (2)
non-core restatement, and (3) non-restating firms (the control sample) in the same
regression:

Fraud and Scorεθ / Non − Scorεθ = θ 0 + θ1Disclosurεθ + θ 2 DACt −1 + θ 3 FINANCE θ

+ θ 4 LEVθ + θ 5 SIZEθ + θ 6 BM θ + θ 7 EPθ + θ 8 ROAθ + θ 9 SALE _ GROWTH θ
+ θ10 MAt + ε 33333333(3)

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 Table 4 reports odds-ratios which represent the change in odds of belonging to the
respective groups (Fraud and Core, Non-Core) compared to the non-restating firms
(control sample). In Model 1, when comparing fraud and core restatement firms and
non-restating firms, the coefficient of Disclosure (θ1=0.4828, z-statistic=3.92) is
positive and significant at the 1% level. According to economic significance, the odds
ratio of 1.621 indicates that the odds of fraud and core restatement for firms
disclosing Non-GAAP earnings is 1.621 times higher than the odds of non-restating
firms with disclosure of Non-GAAP earnings. Comparing non-score restatement firms
and non-restating firms, the coefficient of Disclosure (θ1=-0.1284, z-statistic=-1.18) is
negative but not significant. According to economic significance, the odds ratio of
0.88 indicates that the odds of non-core restatement for firms disclosing Non-GAAP
earnings is 0.88 times as high as the odds of non-restating firms that disclose
Non-GAAP earnings. Comparing coefficients within the multinomial model allows us
to test the effect of Disclosure between fraud/score and non-score misstatement
groups. The association between Disclosure and fraud/core misstatement is
significantly larger than that between Disclosure and non-core misstatements
(unreported chi-square: 20.18, p<0.0001). 12 To summarize, firms that are fraudulent
or misstate core accounts are more likely to disclose Non-GAAP earnings than firms
misstating non-core accounts. However, no significant difference exists between
non-score restating firms and non-restating firms. The above results show that
disclosing Non-GAAP earnings may lead to serious accounting restatements.

Next, I estimate the following multinomial logistic regression model (4) to analyze
the effect of positive other exclusions on the restatement types. I partition our sample
into three subsamples: (1) disclosing Non-GAAP earnings with positive other
exclusions (2) disclosing Non-GAAP earnings with no positive other exclusions, and
(3) no disclosure of Non-GAAP figures. I use the subsample (3) as my control group.
Thus, I assign two dummy variables. The dummy variable Dis_Other takes the value
of 1 if the firm provides Non-GAAP earnings with positive other exclusions
corresponding with announcement of earnings in the fiscal quarter q, while the
dummy variable Dis_noOther has a value of 1 if the firm provides Non-GAAP
earnings without positive other exclusions.

12
This is the result of the comparison of coefficients of Disclosure (θ1) between fraud/core restatement
regression and core restatement.
15

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Fraud and Scorεθ / Non − Scorεθ = φ0 + φ1Dis _ Othεrθ + φ2 Dis _ noOthεrθ
+ φ3 Positivε _ Spεcialθ + φ4 DACt −1 + φ5 FINANCEθ + θ 6 LEVθ
+ φ7 SIZEθ + φ8 BM θ + φ9 EPθ + φ10 ROAθ + φ11SALE _ GROWTH θ
+ φ12 MAt + ε 33333333(4)

Model 2 in Table 4 shows the results. When comparing fraud/core restating firms
and non-restating firms (reference group), the coefficient of Dis_Other (φ1=0.6090,
z-statistic=4.08) is significant at the 1% level. When comparing non-core restating
firms and non-restating firms, the coefficient of Dis_Other (φ2=0.0084,
z-statistic=0.06) is not significant. To compare coefficients, the association between
Dis_Other and fraud/core misstatement is significantly larger than that between
Dis_Other and non-core misstatement (unreported chi-square: 13.65, p<0.0001).
These results are consistent with H3 which contends that firms with positive other
exclusions excluded from Non-GAAP earnings exhibit increased likelihood of fraud
or core-earnings restatement.

According to Dis_noOther, when comparing fraud/core restating firms and

non-restating firms, the coefficient (φ2=0.2766, z-statistic=1.42) is positive but not
significant. The coefficient of Dis_noOther (φ2=-0.3822, z-statistic=-2.33) is
significantly negative at the 5% level, when comparing non-core restating firms and
non-restating firms. This means that the relative log odds of being in non-core
restatement vs. in non-restatement will decrease by 0.3822 from non-disclosing
Non-GAAP earnings to disclosing those without positive other exclusions. The odds
ratio of switching from non-disclosing Non-GAAP earnings to disclosing those
without positive other exclusions is 0.686 in non-core restatement vs. in
non-restatement. In other words, the likelihood of non-core restatement is lower for
firms which disclose Non-GAAP earnings without positive other exclusions, while the
likelihood of non-restatement is higher for firms which disclose Non-GAAP earnings
without positive other exclusions. This result indicates that reporting Non-GAAP
earnings without positive exclusions is less likely to lead to restatement and instead, is
more informative. The results of the control variables in Table 4 are qualitatively and
quantitatively very similar to those in Table 3.

Taken together, firms that are fraudulent or misstate core accounts are more likely
to disclose Non-GAAP earnings than firms misstating non-core accounts and
non-restating firms. Further, firms with positive other exclusions excluded from
Non-GAAP earnings may exhibit increased likelihood of fraud or core-earnings

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restatement. Thus, these results demonstrate that managers will use Non-GAAP
earnings to manipulate investors’ perceptions.

[Insert Table 4]

4.3 The Effect of Accounting Complexity

In this section, I analyze the effect of accounting complexity. For analysis of H4a, I
estimate the following logistic regression model:

Logit(Re statementq ) = υ0 + υ1Dis _ Complex _ H q + υ2 Dis _ Complex _ Lq

+ υ3 NonDis _ Complex _ H q + υ4 DACt −1 + υ5 FINZANCEq + υ6 LEVq + υ7 SIZEq
+ υ8 BM q + υ9 EPq + υ10 ROAq + υ11SALE _ GROWTH q + υ12 MAt 3333( 5 )

In order to analysis the effect of accounting complexity, I partition our sample into
four subsamples: (1) firms disclosing Non-GAAP earnings and having high
accounting complexity (the accounting policy length is above the industry median) (2)
firms disclosing Non-GAAP earnings and having low accounting complexity (if the
accounting policy length is low the industry median) (3) firms with high accounting
complexity and no disclosure of Non-GAAP figures, and (4) firms with low
accounting complexity and no disclosure of Non-GAAP figures. I use the subsample
(4) as my control group. Thus, I assign three dummy variables. The dummy variable
Dis_Complex_H has a value of 1 if a firm has high accounting complexity and
provides Non-GAAP earnings corresponding with announcement of earnings in the
fiscal quarter q. The dummy variable Dis_Complex_L has a value of 1 if a firm with
low accounting complexity provides Non-GAAP earnings. The dummy variable
NonDis_Complex_H has a value of 1 if a firm with high accounting complexity does
not provide Non-GAAP earnings.

Model 1 in Table 5 shows the results. The coefficient of Dis_Complex_H

(ν1=0.6248, z-statistic = 5.09) is significant at the 1% level. The odds ratio of 1.868
indicates that the odds of restatement for firms disclosing Non-GAAP earnings and
having high accounting complexity is 1.868 times higher than the odds of firms with
low accounting complexity and with no disclosure of Non-GAAP figures (control
group). The effect is substantial. The coefficient of Dis_Complex_L (ν2=0.0739,
z-statistic=0.54) is positive but not significant. To compare coefficients, the
association between Dis_Complex_H and restatement is significantly larger than that

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between Dis_Complex_L and restatement (unreported chi-square: 11.33, p=0.0008) 13.
Therefore, firms disclosing Non-GAAP earnings and high accounting complexity are
more likely to restate than those disclosing Non-GAAP earnings and low accounting
complexity, consistent with H4a. However, the coefficient of NonDis_Complex_H 14
(ν3=0.7231, z-statistic=8.16) is significant at the 1% level. The odds ratio of 2.061 is
even higher than the odds ratio (1.868) for firms disclosing Non-GAAP earnings and
having high accounting complexity. Compared to firms disclosing Non-GAAP
earnings and high accounting complexity, firms that do not disclose Non-GAAP
earnings and have high accounting complexity still experience accounting
restatements. Therefore, the above results have two implications. First, firms
disclosing Non-GAAP earnings and having high accounting complexity are much
more likely to restate than those with low accounting complexity. Thus, firms with
higher accounting complexity find it easier to use discretionary accruals to engage in
earnings management. Firms choose to provide the Non-GAAP earnings to affect
investors’ perceptions only after they exhaust opportunities for exercising
within-GAAP discretion. Thus, disclosing Non-GAAP earnings conveys a strong
signal about earnings management, that will later lead to restating. Second, whether or
not Non-GAAP figures are disclosed, firms with high accounting complexity are more
likely to experience restating, consistent with the empirical results of Peterson (2012).

H4b discusses the interaction between accounting complexity and positive other
exclusions. I estimate the following logistic regression model:

Logit (Re statementq ) = ω0 + ω1 Dis _ Complex _ H_Otherq + ω2 Dis _ Complex _ L _ Otherq

+ ω3 Dis _ Complex _ H _ noOtherq + ω4 Dis _ Complex _ L _ noOtherq
+ ω5 NonDis _ Complex _ H q + ω6 DACt −1 + ω7 FINZANCEq + ω8 LEVq + ω8 SIZEq
+ ω9 BM q + ω10 EPq + ω11 ROAq + ω12 SALE _ GROWTH q + ω13 MAt 3333 (6)

I partition our sample into six subsamples: (1) firms disclosing Non-GAAP
earnings, with positive exclusions and high accounting complexity; (2) firms
disclosing Non-GAAP earnings, with positive exclusions and low accounting
complexity; (3) firms disclosing Non-GAAP earnings and high accounting complexity
but with no positive other exclusions; (4) firms disclosing Non-GAAP earnings and
having low accounting complexity but with no positive other exclusions; (5) firms
with high accounting complexity and with no disclosure of Non-GAAP figures; and

13
This is the result of comparison of coefficients between Dis_Complex_H (υ1) and Dis_Complex_L
(υ2).
14
The firms with high accounting complexity do not disclose Non-GAAP earnings.
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(6) firms with low accounting complexity and with no disclosure of Non-GAAP
figures. I use the subsample (6) as my reference group. Thus, I assign five dummy
variables. The dummy variable Dis_Complex_H_Other has a value of 1 if a firm with
high accounting complexity provides Non-GAAP earnings and positive other
exclusions corresponding with announcement of earnings in the fiscal quarter q. The
dummy variable Dis_Complex_L_Other has a value of 1 if a firm with low accounting
complexity provides Non-GAAP earnings and positive other exclusions.
Dis_Complex_H_noOther has a value of 1 if a firm with high accounting complexity
provides Non-GAAP earnings with no positive other exclusions.
Dis_Complex_L_noOther has value of 1 if a firm with low accounting complexity
provides Non-GAAP earnings without positive other exclusions. The dummy variable
NonDis_Complex_H has a value of 1 if a firm with high accounting complexity does
not provide Non-GAAP earnings.

Model 2 in Table 5 shows the results. The coefficient of Dis_Complex_H_Other

(ω1=0.6555, z-statistic = 4.54) is significant at the 1% level, while the coefficient of
Dis_Complex_L_Other (ω2=0.3062, z-statistic = 1.59) is positive but not significant.
This means that the relative log odds of restating vs. non-restating will increase by
0.6555 from firms without disclosing Non-GAAP earnings to firms which experience
high accounting complexity and disclose Non-GAAP earnings with positive other
exclusions. However, the relative log odds of restating vs. non-restating will increase
by just 0.3062 from firms without disclosing Non-GAAP earnings to firms which
experience low accounting complexity and disclose Non-GAAP earnings with
positive other exclusions. I further compare the coefficients of
Dis_Complex_H_Other and Dis_Complex_L_Other. The association between
Dis_Complex_H_Other and restatement is significantly larger than that between
Dis_Complex_L_Other and restatement (unreported chi-square: 2.9818, p=0.10) 15. In
other words, the contemporaneous association between disclosing Non-GAAP
earnings with positive other exclusions and restatement is stronger for firms with
greater accounting complexity than for those with less accounting complexity,
consistent with H4b.

According to firms which disclose Non-GAAP earnings without positive other

exclusions, the coefficient of Dis_Complex_H_NoOther (ω3=0.5541, z-statistic = 2.83)
is significant at the 1% level, while the coefficient of Dis_Complex_L_NoOther
(ω4=-0.1548, z-statistic = -0.81) is negative but not significant. It means that the

15
This is the result of comparison of coefficients between Dis_Complex_H_Other (ω1) and
Dis_Complex_L_Other ( ω2).
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relative log odds of being in restatement vs. non-restating will increase by 0.5541
from firms without disclosing Non-GAAP earnings to firms which experience high
accounting complexity and disclose Non-GAAP earnings without positive other
exclusions. However, the relative log odds of restating vs. non-restating will decrease
by 0.1548 from firms without disclosing Non-GAAP earnings to firms which
experience low accounting complexity and disclose Non-GAAP earnings without
positive other exclusions. The association between Dis_Complex_H_NoOther and
restatement is significantly larger than that between Dis_Complex_L_NoOther and
restatement (unreported chi-square: 7.7934, p=0.0052) 16 . Thus, the likelihood of
restatement is higher for firms which disclose Non-GAAP earnings without positive
other exclusions and experience high accounting complexity, while the likelihood of
restatement is lower for firms which disclose Non-GAAP earnings without positive
other exclusions and experience low accounting complexity.

In sum, whether or not there are positive exclusions, the contemporaneous

association between disclosing Non-GAAP earnings and restatement is stronger for
firms with greater accounting complexity than for those with less accounting
complexity.

[Insert Table 5]

5. Conclusions

In this study, I examine whether disclosing Non-GAAP earnings is a signal the firm
will experience accounting restatement. I find that disclosing Non-GAAP earnings
may still result in restatement under certain conditions related to opportunism.
Furthermore, firms with restatements experience a significant increase in the relative
use of disclosing Non-GAAP earnings with positive other exclusions. In addition,
firms with the positive other exclusions excluded from Non-GAAP earnings can
increase the likelihood of fraud or core-earnings restatement. Finally, firms disclosing
Non-GAAP earnings and high accounting complexity are more likely to restate than
those disclosing Non-GAAP earnings and low accounting complexity.

This study contributes to the existing literature on Non-GAAP earnings and

restatements by providing a contemporaneous look at the firms that ultimately issue
Non-GAAP figures. Understanding the signal of aggressive accounting conveyed by
filing non-GAAP reports should be of interest to auditors, audit committees, investors,

16
It is the result of comparison of coefficients between Dis_Complex_H_NoOther (ω3) and
Dis_Complex_L_NoOther ( ω4).
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and regulators.

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Table 1 Selected Summary Statistics for Sample and Control Firms
Restatement Sample Control Sample Difference
Variables Mean Median Mean Median t-value
GAAP Earnings 0.2562 0.0000 0.3030 0.1400 -1.67 *
Non-GAAP Earnings 0.1141 0.0000 0.0921 0.0000 1.96 **
DAC 0.3748 -0.0152 0.1185 -0.0254 2.34 **
FINANCE 0.1370 0.0000 0.1299 0.0000 0.58
LEV 0.2160 0.2002 0.2103 0.1944 0.85
SIZE 21.1802 21.0802 21.4056 21.2446 -4.32 ***
BM 0.5939 0.4962 0.4239 0.4031 5.44 ***
EP 0.0226 0.0421 0.0830 0.0485 -3.26 ***
ROA 0.0445 0.0480 0.0529 0.0658 -2.13 **
SALE_GROWTH 0.1167 0.0902 0.1116 0.0944 0.71
MA 0.1308 0.0000 0.1223 0.0000 0.73
Variable Definitions:
GAAP Earnings: GAAP earnings press releases are from LexisNexis specifically, the PR Newswire and
Business Wire—for the years 2004-2013.
Non-GAAP Earnings: Non-GAAP earnings press releases are from LexisNexis specifically, the PR
Newswire and Business Wire—for the years 2004-2013.
DAC: Discretionary Accruals are generated from modified version of the Jones model (Dechow et al.,
1995).
FINANCE: Equals 1 if cash from operations less average of previous three years capital expenditures
scaled by the previous period’s current assets is less than -0.5, and 0 otherwise.
LEV: LEV is defined as total debt/total assets.
SIZE: SIZE is defined as log of market value of equity.
BM: BM is defined as book value of equity/market value of equity.
EP: EP is defined as EPS/ fiscal year-end stock price.
ROA: ROA is defined as net income/total assets.
SALE_GROWTH: It is defined as the percentage change in sales from the quarterly q prior fiscal
year to the quarterly q current fiscal year.
MA: Equals 1 if a firm has the occurrence of a merger or acquisition during the fiscal year t.
*, **, *** Indicate significance at 10 percent, 5 percent, and 1 percent levels, respectively.

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Table 2 Cross-Tabulates the Frequency of Major Variables
Disclosure Positive_Other Positive_SpecialC High_AC
Restatement 0 1 0 1 0 1 0 1
0 79.17% 20.83% 45.40% 54.60% 59.95% 40.05% 64.19% 35.81%
1 78.93% 21.07% 36.09% 63.91% 57.45% 42.46% 49.61% 50.39%
χ 2
0.03 5.96 **
1.90 68.39
p_value 0.8674 0.0146 0.1679 <0.0001
Disclosure a value of 1 if the firm provides Non-GAAP earnings corresponding with announcement of earnings in the
fiscal quarter q. Positive_Other has a value of 1 if the firm provides positive other exclusions. Positive_SpecialC has a
value of 1 if the firm has positive special items generated from Compustat. High_AC has a value of 1 if the firm’s
accounting policy length is above the industry median.

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Table 3 Logistic Analysis of the Effect of Disclosing Non-GAAP Earnings on Restatement (H1 and H2)
Model 1 Model 2
Variables Sign Coefficient Odds ratio Coefficient Odds ratio
Intercept 2.3290 *** 2.3412 ***
(3.68) (3.70)
Disclosure + 0.1078 1.114
(1.16)
Dis_Other + 0.2374 ** 1.268
(2.07)
Dis_noOther ? -0.1325 0.876
(-1.02)
Positive_Special ? 0.0957 1.100
(1.18)
DAC + 0.0374 *** 1.038 0.0367 *** 1.037
(3.04) (2.98)
FINANCE + -0.1100 0.896 -0.0814 0.922
(-0.93) (-0.68)
LEV + 0.1354 1.145 0.1597 1.173
(0.59) (0.69)
SIZE ? -0.1220 *** 0.885 -0.1249 *** 0.883
(-4.09) (-4.18)
BM - 0.2958 *** 1.344 0.2958 *** 1.344
(4.02) (4.02)
EP - -0.2747 *** 0.760 -0.2701 *** 0.763
(-2.96) (-2.91)
ROA - -0.6194 0.538 -0.4703 0.625
(1.42) (-1.06)
SALE_GROWTH ? 0.3265 1.386 0.3312 1.393
(1.62) (1.64)
MA + 0.0021 1.002 0.0107 1.011
(-0.02) (-0.09)
Obs 3,027 3,027
Pseudo R-squared 0.0373 0.0398
This table reports the results of logistic regression comparing each of the restatement firms to the control firms
(non-restating). Disclosure has a value of 1 if the firm provides Non-GAAP earnings corresponding with
announcement of earnings in the fiscal quarter q. Other exclusions are defined as total Non-GAAP exclusions
less special items. Dis_Other has a value of 1 if the firm provides Non-GAAP earnings with positive other
exclusions corresponding with announcement of earnings in the fiscal quarter q. Dis_noOther has a value of 1 if
the firm provides Non-GAAP earnings without positive other exclusions. Positive_Special has a value of 1 if the
firm has positive special items reported by Compustat. Other variables are defined in Table 1. Odds ratios for
continuous variables are calculated as (exp (βjsj)-1) where βj is the estimated regression coefficient and sj is the
sample standard deviation of variable j. The odd ratios for continuous variables represent the change in odds of
belonging to the respective groups given a one standard deviation change in the model variable. Odds ratios for
indicator variables are calculated as (exp (βj)-1). The odd ratios for continuous variables represent the change in
odds of belonging to the respective group given a change in the model variable from 0 to 1.
*, **, *** Indicate significance at 10 percent, 5 percent, and 1 percent levels, respectively.

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Table 4 Multinomial Logistic Analysis of the Effect of Disclosing Non-GAAP Earnings on Types of Restatement (Fraud/Core-earnings Misstatement and Non-core Misstatement) (H3)
Model 1 Model 2
Fraud+Score Non-Score Fraud+Score Non-Score
Variables Sign Odds ratio Coefficient Odds ratio Coefficient Odds ratio Coefficient Odds ratio Coefficient
Intercept 1.7723 ** 0.9103 1.7645 ** 0.9272
(2.02) (1.24) (2.01) (1.26)
Disclosure + 1.621 0.4828 *** 0.880 -0.1284
(3.92) (-1.18)
Dis_Other + 0.6090 *** 0.0084
(4.08) (0.06)
Dis_noOther ? 0.2766 -0.3822 **
(1.42) (-2.33)
Positive_Special ? 0.0622 0.1063
(0.54) (1.16)
DAC + 1.030 0.0300 * 1.042 0.0414 *** 0.0292 * 0.0406 ***
(1.79) (3.07) (1.74) (2.99)
FINANCE + 0.575 -0.5537 *** 1.066 0.0637 -0.5366 *** 0.0962
(-3.00) (0.49) (-2.87) (0.73)
LEV + 1.469 0.3848 0.988 -0.0124 0.4145 0.0092
(1.22) (-0.05) (1.31) (0.03)
SIZE ? 0.869 -0.1405 *** 0.917 -0.0863 ** -0.1427 *** -0.0899 ***
(-3.35) (-2.25) (-3.39) (-2.62)
BM - 1.086 0.0821 1.913 0.6489 *** 0.0881 0.6480 ***
(1.20) (6.64) (1.29) (6.62)
EP - 0.694 -0.3659 *** 0.669 -0.4023 *** -0.3633 *** -0.4012 ***
(-3.25) (-3.60) (-3.24) (-3.57)
ROA - 0.142 -1.9487 *** 2.773 -1.0200 * -1.9215 *** 1.1387 **
(-3.67) (1.89) (-3.52) (2.07)
SALE_GROWTH ? 1.202 0.1839 1.298 0.2606 0.3800 0.3462
(0.69) (1.21) (1.34) (1.53)
MA + 0.724 0.3224 1.193 0.1765 0.3609 ** 0.1570
(1.84) (1.40) (2.06) (1.24)
Obs. 496 961 496 961
Pseudo R-squared 0.0285 0.0298
This table reports the results of a multinomial logistic regression comparing each of the misstatement firm groups (Fraud/Core-earnings Misstatement and Non-core Misstatement) to the control sample.
Disclosure has a value of 1 if the firm provides Non-GAAP earnings corresponding with announcement of earnings in the fiscal quarter q. Other exclusions are defined as total Non-GAAP exclusions less
special items. Dis_Other has a value of 1 if the firm provides Non-GAAP earnings with positive other exclusions corresponding with announcement of earnings in the fiscal quarter q. Dis_noOther has a
value of 1 if the firm provides Non-GAAP earnings with no positive other exclusions. Positive_Special has a value of 1 if the firm has positive special items reported by Compustat. Other variables are
defined in Table 1. Odds ratios for continuous variables are calculated as (exp (βjsj)-1) where βj is the estimated regression coefficient and sj is the sample standard deviation of variable j. The odd ratios
for continuous variables represent the change in odds of belonging to the respective groups given a one standard deviation change in the model variable. Odds ratios for indicator variables are calculated as
(exp (βj)-1). The odd ratios for continuous variables represent the change in odds of belonging to the respective group given a change in the model variable from 0 to 1. Other variables are defined in the
Table 1. The descriptions about odds ratio can refer the notes of Table 3. *, **, *** Indicate significance at 10 percent, 5 percent, and 1 percent levels, respectively.

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Table 5 Logistic Analysis of the Effect of Accounting Complexity
Model 1 Model 2
Variables Sign Coefficient Odds ratio Coefficient Odds ratio
Intercept 2.5301 *** 2.5291 ***
(3.90) (3.90)
Dis_Complex_H + 0.6248 *** 1.868
(5.09)
Dis_ Complex_L ? 0.0739 1.077
(0.54)
Dis_ComplexH_Other + 0.6555 *** 1.926
(4.54)
Dis_ComplexL_Other ? 0.3026 1.353
(1.59)
Dis_ComplexH_noOther ? 0.5541 *** 1.740
(2.83)
Dis_ComplexL_noOther ? -0.1548 0.857
(-0.81)
NonDis_ComplexH + 0.7231 *** 2.061 0.7211 *** 2.057
(8.16) (8.07)
Positive_Special ? 0.0131 1.013
(0.16)
DAC + 0.0331 *** 1.034 0.0329 *** 1.033
(2.67) (2.65)
FINANCE + -0.1598 0.852 -0.1563 0.855
(-1.33) (-1.28)
LEV + 0.1257 1.134 0.1527 1.165
(0.54) (0.65)
SIZE ? -0.1453 *** 0.865 -0.1458 *** 0.864
(-4.73) (-4.73)
BM - 0.3105 *** 1.364 0.3093 *** 1.362
(4.16) (4.15)
EP - -0.2353 *** 0.790 -0.2323 0.793
(-2.56) (-2.55)
ROA - 0.0035 1.003 0.0408 1.042
(0.01) (0.09)
SALE_GROWTH ? 0.2189 1.245 0.2129 1.237
(1.13) (1.10)
MA + 0.0227 1.023 0.0219 1.022
(0.20) (0.19)
Obs 3012 3012
Pseudo R-squared 0.0689 0.0703
This table reports the results of logistic regression comparing each of the restatement firms to the control firms (non-restating)
based on accounting complexity. Dis_Complex_H has a value of 1 if a firm with high accounting complexity provides
Non-GAAP earnings corresponding with announcement of earnings in the fiscal quarter q. Dis_Complex_L has a value of 1 if
a firm with low accounting complexity provides Non-GAAP earnings. NonDis_Complex_H has a value of 1 if a firm with
high accounting complexity does not provide Non-GAAP earnings. Dis_Complex_H_Other has a value of 1 if a firm with
high accounting complexity provides Non-GAAP earnings and positive other exclusions corresponding with announcement
of earnings in the fiscal quarter q. Dis_Complex_L_Other has a value of 1 if a firm with low accounting complexity provides
Non-GAAP earnings and positive other exclusions. Dis_Complex_H_noOther has a value of 1 if a firm with high accounting
complexity provides Non-GAAP earnings without positive other exclusions. Dis_Complex_L_noOther has a value of 1 if a
firm with low accounting complexity provides Non-GAAP earnings without positive other exclusions. The dummy variable
NonDis_Complex_H has a value of 1 if a firm with high accounting complexity does not provide Non-GAAP earnings. For
descriptions of the odds ratio refer to the notes of Table 3. Other variables are defined in the Table 1. *, **, *** Indicate
significance at 10 percent, 5 percent, and 1 percent levels, respectively.

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