Short Sellers and Financial Misconduct
Journal of Finance, Vol. 65, No. 5 (October 2010), pp. 1879-1913
72 Pages Posted: 6 Mar 2008 Last revised: 21 Jun 2017
Date Written: August 5, 2009
Abstract
We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time-to-discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values when firms provide incorrect financial information.
Keywords: Short sales, financial misrepresentation, market efficiency, information
JEL Classification: G14, G38, M41, M43, M45
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Short Sale Constraints and Stock Returns
By Charles M. Jones and Owen A. Lamont
-
Short Sale Constraints and Stock Returns
By Charles M. Jones and Owen A. Lamont
-
Breadth of Ownership and Stock Returns
By Joseph Chen, Harrison G. Hong, ...
-
Breadth of Ownership and Stock Returns
By Joseph Chen, Harrison G. Hong, ...
-
Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
By Owen A. Lamont and Richard H. Thaler
-
Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
By Owen A. Lamont and Richard H. Thaler
-
Limited Arbitrage in Equity Markets
By Mark L. Mitchell, Todd C. Pulvino, ...
-
Dotcom Mania: The Rise and Fall of Internet Stock Prices
By Eli Ofek and Matthew P. Richardson
-
Dotcom Mania: The Rise and Fall of Internet Stock Prices
By Eli Ofek
-
Dotcom Mania: The Rise and Fall of Internet Stock Prices
By Eli Ofek and Matthew P. Richardson