We investigate whether firms change their non-GAAP reporting practices after debt covenant violations. We find that the likelihood that a firm will disclose non-GAAP earnings decreases and (for those that continue to disclose) the quality of non-GAAP reporting improves following covenant violations, consistent with stronger shareholder monitoring during this period of scrutiny. Consistent with increased monitoring following a debt covenant violation, cross-sectional analyses indicate that these changes in non-GAAP reporting are concentrated among firms with strong governance. Moreover, we find that investor demand for disclosure (proxied by analyst-provided non-GAAP performance metrics and EDGAR search volume) increases following a covenant violation. Collectively, our evidence is consistent with heightened investor scrutiny following covenant violations, and it casts doubt on the competing explanation that shareholders delegate monitoring to creditors following a covenant violation. Overall, our evidence provides new insights on the determinants of firms' non-GAAP reporting practices and an alternative view about how debt covenant violations influence voluntary disclosure.

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SYNOPSIS This study investigates whether auditors' industry specializations are valued by the capital market. By using a quasi-experimental research design, we control for the confounding effects of auditor choices, which are often found in prior studies. Specifically, we examine whether an auditor's non-restating audit clients suffer collateral damage from restatements of the same auditor's other clients. If an auditor's industry specialization is valued by the market, the contagion effect should be greater for clients of industry specialist auditors. We find that the non-restating clients of city-level industry specialists whose other clients issue restatements experience −0.8 percent abnormal returns around restatement announcements. For national industry specialists, we find negative market reaction to the auditors' non-restating clients only when the restatements convey severe negative signals. Overall, the evidence is consistent with the notion that auditors' reputations as national- and city-level specialists are priced at a premium in the capital markets.

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