Short-Selling Pressure, Reporting Transparency, and the Use of Real and Accruals Earnings Management to Meet Benchmarks

42 Pages Posted: 2 Apr 2016 Last revised: 1 Jan 2018

See all articles by Kristina M. Rennekamp

Kristina M. Rennekamp

SC Johnson Graduate School of Business; Cornell SC Johnson College of Business; Cornell University - Department of Accounting

Kathy Rupar

Georgia Institute of Technology

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance

Date Written: December 22, 2017

Abstract

Prior literature finds that short selling is beneficial to the market because it increases liquidity and helps to discipline optimistic market prices. In this paper we use two controlled experiments to examine the potential for an unintended consequence of allowing short selling or easing short selling restrictions. Because prior research identifies short sellers as sophisticated market participants who have the ability to see through accrual earnings management choices, we predict and find that, when reporting is transparent, managers are more likely to use real earnings management (REM) relative to accrual earnings management (AEM) when short selling restrictions are relaxed. This is consistent with the idea that REM activities are more defensible as the result of legitimate operating decisions, and are therefore more likely to hold up to scrutiny from short sellers. Overall, our results suggest that regulations that are unrelated to financial reporting can affect how managers respond to the transparency that arises from financial reporting regulations.

Keywords: short selling, transparency, real earnings management, accruals, earnings benchmarks, managerial incentives

JEL Classification: M40, M41

Suggested Citation

Rennekamp, Kristina M. and Rupar, Kathy and Seybert, Nicholas, Short-Selling Pressure, Reporting Transparency, and the Use of Real and Accruals Earnings Management to Meet Benchmarks (December 22, 2017). Robert H. Smith School Research Paper No. RHS 2757150, Available at SSRN: https://ssrn.com/abstract=2757150 or http://dx.doi.org/10.2139/ssrn.2757150

Kristina M. Rennekamp

SC Johnson Graduate School of Business ( email )

Ithaca, NY 14853
United States
607-255-0500 (Phone)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Cornell University - Department of Accounting ( email )

401P - Sage Hall
Cornell University
Ithaca, NY 14853
United States
607-255-0500 (Phone)

Kathy Rupar (Contact Author)

Georgia Institute of Technology ( email )

800 W Peachtree St NW
Suite 445
Atlanta, GA 30308-1149
United States
4043855713 (Phone)

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

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