A Ripple in the Muddy Waters: The Luckin Coffee Scandal and Short Selling Attacks

Abstract

Luckin Coffee was extolled as the Chinese challenger of Starbucks. However, nine months after its IPO on NASDAQ, Luckin was accused of accounting fraud but did not confessed to the allegations until two months later. This scandal caused wide concerns, not only on Luckin but also two related firms. We found evidence that the two related firms suffered from panic-selling not upon the release of the allegations, but after Luckin's own confession. We found evidence of short squeeze in the short selling attacks before Luckin's confession, pointing to non-negligible shorting selling risks. Our results also indicate the difficulty for non-stakeholders to impound negative corporate information into the stock price.

Keywords: Financial Fraud, Luckin Coffee, Short Selling Risk

JEL Classification: G14, G18