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
September 11, 2013
During 2005-2007, 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 reduce during this period, and revert to pre-experiment levels when the program ends. Conditional on committing financial misconduct, pilot firms are more likely to be caught. Pilot firms’ earnings response coefficients decline and coefficients of current returns on future earnings increase, then revert to pre-experiment levels after the program. We conclude that decreases in short selling costs constrain firms’ opportunistic reporting behavior and enhance share price efficiency.
Number of Pages in PDF File: 55
Keywords: Regulation SHO, Pilot Program, Short Selling, Earnings Management, Price efficiency
JEL Classification: G14, G18, G34, M41working papers series
Date posted: June 29, 2013 ; Last revised: September 12, 2013
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