The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?
INSEAD - Finance
University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)
Tsinghua University - PBC School of Finance; INSEAD - Finance
October 9, 2014
Review of Financial Studies, Forthcoming
INSEAD Working Paper No. 2012/93/FIN
Asian Finance Association (AsFA) 2013 Conference
We hypothesize that short selling has a disciplining role vis-à-vis firm managers that forces them to reduce earnings management. Using firm-level short-selling data for 33 countries collected over a sample period from 2002 to 2009, we document a significantly negative relationship between the threat of short selling and earnings management. Tests based on instrumental variable and exogenous regulatory experiments offer evidence of a causal link between short selling and earnings management. Our findings suggest that short selling functions as an external governance mechanism to discipline managers.
Number of Pages in PDF File: 91
Keywords: short-selling, earning manipulation, international finance, governance
JEL Classification: G30, M41
Date posted: August 6, 2012 ; Last revised: October 2, 2015
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