The Invisible Hand of Short-Selling: Does Short-Selling Discipline Earnings Manipulation?

Massimo Massa

INSEAD - Finance

Bohui Zhang

University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)

Hong Zhang

INSEAD - Finance; PBC School of Finance

December 12, 2012

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 the managers forcing them to reduce earnings manipulation. Using firm-level short-selling data over the sample period of 2002 to 2009 across 33 countries, we document a significantly negative relationship between lending supply and activism in the short-selling market and earnings manipulation. Using an instrumental variable approach as well as focusing on exogenous events (cross-sectional and time series regulatory and market restrictions), we provide evidence of a causal link from short selling potential to lower earnings manipulation. Overall, our findings suggest that short selling provides an external governance mechanism to discipline managerial incentives.

Number of Pages in PDF File: 66

Keywords: short-selling, earning manipulation, international finance, governance

JEL Classification: G30, M41

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Date posted: August 6, 2012 ; Last revised: January 28, 2013

Suggested Citation

Massa, Massimo and Zhang, Bohui and Zhang, Hong, The Invisible Hand of Short-Selling: Does Short-Selling Discipline Earnings Manipulation? (December 12, 2012). INSEAD Working Paper No. 2012/93/FIN; Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: http://ssrn.com/abstract=2124464 or http://dx.doi.org/10.2139/ssrn.2124464

Contact Information

Massimo Massa
INSEAD - Finance ( email )
Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)
Bohui Zhang (Contact Author)
University of New South Wales (UNSW) - School of Banking and Finance ( email )
Australian School of Business
Sydney NSW, 2052
61293855834 (Phone)
61293856347 (Fax)
HOME PAGE: http://www.banking.unsw.edu.au/nps/servlet/portalservice?GI_ID=System.LoggedOutInheritableArea&maxWn

Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
HOME PAGE: http://www.firn.org.au

Hong Zhang
INSEAD - Finance ( email )
1 Ayer Rajah Avenue
+65 6799 5340 (Phone)
+65 6799 5366 (Fax)
PBC School of Finance ( email )
No. 43 Chengfu Road
Haidian district
Beijing, 100083
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