Short Seller Trading in Companies with a Severe Accounting Irregularity

39 Pages Posted: 24 Nov 2009

See all articles by Jap Efendi

Jap Efendi

University of Texas at Arlington

Edward P. Swanson

Texas A&M University - Mays Business School; Mays Business School, Texas A&M University

Date Written: August 31, 2009

Abstract

We find that shorts establish significant positions more than a year before the average restatement announcement, those positions increase as the announcement month approaches, and the largest positions are held in companies that will announce an accounting irregularity that attracts class action litigation. Shorts are thereby well positioned to profit from the lengthy string of negative returns that precede the announcement of a severe accounting irregularity. Afterward, we find average short interest is sticky, and shorts retain positions in firms that experience a further price decline. In the six months after an announcement, positions in heavily shorted restating firms (i.e., short interest exceeding 2.5 percent before the announcement) earn an additional 24 percent (31 percent with class action litigation). We conclude that shorts have the skill to play an important private-sector role in identifying and disciplining companies with accounting irregularities.

Keywords: short selling, restatements, financial analysis, arbitrage

JEL Classification: M41, M43, G12, G14

Suggested Citation

Efendi, Jap and Swanson, Edward P., Short Seller Trading in Companies with a Severe Accounting Irregularity (August 31, 2009). Available at SSRN: https://ssrn.com/abstract=1465156 or http://dx.doi.org/10.2139/ssrn.1465156

Jap Efendi

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

Edward P. Swanson (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-8970 (Phone)
979-845-0028 (Fax)

Mays Business School, Texas A&M University ( email )

Wehner, MS 4353
College Station, TX 77843-4353
United States
979-845-5014 (Phone)
979-845-0028 (Fax)

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