Short Selling Around Restatement Announcements: When Do Bears Pounce?

46 Pages Posted: 18 Aug 2010 Last revised: 7 Sep 2014

See all articles by Michael S. Drake

Michael S. Drake

Brigham Young University - Marriott School

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Susan Scholz

University of Kansas - Accounting and Information Systems Area

Nathan Y. Sharp

Texas A&M University - Department of Accounting

Date Written: July 1, 2014

Abstract

This paper draws on two distinct literatures – one that investigates the impact of accounting restatements and another that investigates the trading behavior of short sellers – to further our understanding of how sophisticated investors process and respond to news about accounting corrections. We examine short-seller behavior in the days surrounding restatement announcements to determine when short sellers identify restatements and how they trade on restatement news. Our findings suggest that short sellers do not appear to anticipate restatement announcement dates, but we find that abnormal short selling is significantly higher than is typical when restatements are announced, especially for restatements announced transparently (i.e., in press releases or 8-Ks). Short sellers target small companies, whose information environments may be weaker, and companies making restatements that reduce previously reported income. In addition, we find that restating companies targeted most heavily by short sellers experience the most negative subsequent abnormal returns over horizons of up to 40 trading days following the restatement disclosure. Overall, our results suggest that short sellers respond to, but do not anticipate, restatement announcements and trade as if they understand the post-announcement stock price implications of restatement disclosures.

Keywords: Short sellers, short interest, information revelation, accounting restatements, market reactions

JEL Classification: G14, G38, M41, M48

Suggested Citation

Drake, Michael S. and Myers, Linda A. and Scholz, Susan and Sharp, Nathan Y., Short Selling Around Restatement Announcements: When Do Bears Pounce? (July 1, 2014). Available at SSRN: https://ssrn.com/abstract=1351986 or http://dx.doi.org/10.2139/ssrn.1351986

Michael S. Drake

Brigham Young University - Marriott School ( email )

United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Susan Scholz (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)

Nathan Y. Sharp

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

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