Short Selling and Earnings Management: A Controlled Experiment
Vivian W. Fang
University of Minnesota - Twin Cities - Department of Accounting
Hong Kong University of Science and Technology - Department of Accounting
Jonathan M. Karpoff
University of Washington - Michael G. Foster School of Business
August 17, 2015
Journal of Finance, Forthcoming
During 2005 to 2007, the SEC ordered a pilot program in which one-third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short-sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre-experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.
Number of Pages in PDF File: 60
Keywords: Regulation SHO, Pilot Program, Short Selling, Earnings Management, Fraud Discovery, Price Efficiency
JEL Classification: G14, G18, G19, M41, M48
Date posted: June 29, 2013 ; Last revised: August 18, 2015
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