The Informational Role of Short Sellers – The Evidence from Short Sellers’ Reports on U.S.-Listed Chinese Firms

Journal of Business Finance & Accounting, forthcoming

54 Pages Posted: 27 Jan 2014 Last revised: 23 Nov 2016

See all articles by Lei Chen

Lei Chen

Southwestern University of Finance and Economics (SWUFE)

Date Written: August 3, 2016

Abstract

Using U.S.-listed Chinese firms as the setting, this paper studies a novel channel through which investors can acquire information about firms’ financial reporting quality, that is, the reports published voluntarily by short sellers. I find that short sellers tend to target firms that have financial reporting red flags and that exhibit “good” operating performance and stock valuations. Targeted firms experience an average three-day cumulative abnormal return (CAR) of -6.4%, and -13.6% for initial coverage of the firm, and the CARs are more negative when the reports allege more severe misconduct of the firms. Non-targeted firms also experience losses in value following short-seller reports, especially when they hire the same non-Big 4 auditors as targeted firms and when their earnings quality is poor. In comparison, analysts fail to perform proper due diligence and are much less effective than short sellers in exposing misreporting risk in Chinese firms.

Keywords: short sellers' reports, U.S.-listed Chinese firms, information intermediary, financial reporting quality

JEL Classification: G14, G38, M41, M48

Suggested Citation

Chen, Lei, The Informational Role of Short Sellers – The Evidence from Short Sellers’ Reports on U.S.-Listed Chinese Firms (August 3, 2016). Journal of Business Finance & Accounting, forthcoming, Available at SSRN: https://ssrn.com/abstract=2385697 or http://dx.doi.org/10.2139/ssrn.2385697

Lei Chen (Contact Author)

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
407
Abstract Views
2,638
rank
101,022
PlumX Metrics