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Short Sellers and Financial MisconductJonathan M. KarpoffUniversity of Washington - Michael G. Foster School of Business Xiaoxia LouUniversity of Delaware - Alfred Lerner College of Business and Economics August 5, 2009 Journal of Finance, Forthcoming AFA 2008 San Francisco Meetings Paper EFA 2008 Athens Meetings Paper Abstract: We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time-to-discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values when firms provide incorrect financial information.
Number of Pages in PDF File: 72 Keywords: Short sales, financial misrepresentation, market efficiency, information JEL Classification: G14, G38, M41, M43, M45 Accepted Paper SeriesDate posted: March 6, 2008 ; Last revised: June 9, 2010Suggested CitationContact Information
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