Third-Party Consequences of Short-Selling Threats: The Case of Auditor Behavior

Forthcoming, Journal of Accounting and Economics

2016 Canadian Academic Accounting Association (CAAA) Annual Conference

49 Pages Posted: 13 Jan 2016 Last revised: 9 Oct 2016

Date Written: October 8, 2016

Abstract

This study examines how short-selling threats affect auditors. During 2005-2007, the SEC ordered a pilot program in which one-third of the Russell 3000 index firms were arbitrarily chosen to be exempted from short-sale price tests. As a result, these stocks faced significantly higher short-selling threats. We implement a difference-in-differences test with firm fixed effects to show that auditors react to the increased threats and charge higher audit fees to the pilot firms. Further, we find that the impact only exists when auditors are concerned with the bankruptcy risk or when managers are less likely disciplined by short sellers.

Keywords: Short Selling, Audit Fees, Regulation SHO, Bankruptcy Risk, CEO Overconfidence

JEL Classification: M41, G30, G33, G34, G38

Suggested Citation

Hope, Ole-Kristian and Hu, Danqi and Zhao, Wuyang, Third-Party Consequences of Short-Selling Threats: The Case of Auditor Behavior (October 8, 2016). Forthcoming, Journal of Accounting and Economics; 2016 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2714402 or http://dx.doi.org/10.2139/ssrn.2714402

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Danqi Hu

Northwestern University - Kellogg School of Management ( email )

2211 campus drive
EVANSTON, IL 60208
United States

Wuyang Zhao

University of Texas at Austin ( email )

Austin, TX 78712
United States
5128262698 (Phone)

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