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
Date Written: August 3, 2016
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: Suggested Citation