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
April 25, 2014
During 2005-2007, the SEC ordered a pilot program in which one-third of the Russell 3000 were arbitrarily chosen as pilot stocks and exempted from short-sale price tests. Pilot firms’ discretionary accruals decrease during this period, and revert to pre-experiment levels when the program ends. Among firms that initiate financial misconduct before the program begins, pilot firms are caught more quickly once the program starts. During the program, pilot firms’ current returns better reflect future earnings, and their post-earnings announcement drift decreases. We conclude that decreases in short selling costs constrain firms’ opportunistic reporting behavior and enhance stock price efficiency.
Number of Pages in PDF File: 56
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: April 29, 2014
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