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CEOs of S&P 500 firms that report high non-GAAP earnings relative to GAAP earnings receive substantial unexplained pay. Crucially, this result remains even after controlling for the level of non-GAAP and GAAP earnings. These firms are relatively poor performers (i.e., low GAAP earnings and stock returns) and have less powerful CEOs, consistent with non-GAAP earnings being used as justification when high executive pay is more likely to cause outrage. Additionally, despite the lower GAAP and return performance, these firms are more likely to beat the earnings targets specified in their compensation plans, which likely increases investors' perceptions of core operating earnings and reduces outrage. Indeed, these firms face less dissent from shareholders and proxy advisors, and no additional media scrutiny. Our evidence suggests that the fraction of CEO pay that seems attributable to opportunistic non-GAAP reporting, while limited, is economically meaningful. JEL Classifications: G14; G34; G38; M12; M41.

Using a difference-in-differences approach, we examine the effect of industry-specific knowledge transfer on audit performance after a merger of two Chinese audit firms with different levels of expertise in an industry. For clients in an industry audited by both merging audit firms, those audited by the audit firm less specialized in that industry belong to the treatment group, while all other clients belong to the control group. We find an economically significant improvement in audit quality (as reflected in a reduction in financial misstatements) for the treatment group relative to the control group in the same merged audit firm. We show the treatment effect is not driven by changes in auditor incentives or personnel movement and is more pronounced when we expect stronger communication between the less and more specialized auditors after the merger. We caution that our findings are specific to China and may not generalize to other countries. Data Availability: Data used in this study are available from public sources identified in the text. JEL Classifications: M42.