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The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?

91 Pages Posted: 6 Aug 2012 Last revised: 2 Oct 2015

Massimo Massa

INSEAD - Finance

Bohui Zhang

University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)

Hong Zhang

Tsinghua University - PBC School of Finance; INSEAD - Finance

Date Written: October 9, 2014

Abstract

We hypothesize that short selling has a disciplining role vis-à-vis firm managers that forces them to reduce earnings management. Using firm-level short-selling data for 33 countries collected over a sample period from 2002 to 2009, we document a significantly negative relationship between the threat of short selling and earnings management. Tests based on instrumental variable and exogenous regulatory experiments offer evidence of a causal link between short selling and earnings management. Our findings suggest that short selling functions as an external governance mechanism to discipline managers.

Keywords: short-selling, earning manipulation, international finance, governance

JEL Classification: G30, M41

Suggested Citation

Massa, Massimo and Zhang, Bohui and Zhang, Hong, The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management? (October 9, 2014). INSEAD Working Paper No. 2012/93/FIN; Review of Financial Studies, Forthcoming; INSEAD Working Paper No. 2012/93/FIN; Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2124464 or http://dx.doi.org/10.2139/ssrn.2124464

Massimo Massa

INSEAD - Finance ( email )

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France
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+33 1 6072 4045 (Fax)

Bohui Zhang (Contact Author)

University of New South Wales (UNSW) - School of Banking and Finance ( email )

Australian School of Business
Sydney NSW, 2052
Australia
61293855834 (Phone)
61293856347 (Fax)

HOME PAGE: http://www.banking.unsw.edu.au/nps/servlet/portalservice?GI_ID=System.LoggedOutInheritableArea&maxWn

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

INSEAD - Finance ( email )

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Singapore
Singapore
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+65 6799 5366 (Fax)

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