Short Selling Prior to Going Concern Disclosures
56 Pages Posted: 12 Jan 2021
Date Written: September 26, 2020
We provide insights into how the market processes going concern audit opinions based on the trading of some well-documented sophisticated investors—short sellers. We find that abnormal short selling increases significantly upon impending going concern disclosures. While prior literature attributed much of short selling around some corporate events to private information, we find evidence that pre-going-concern announcement short selling reflects both privately informed trading and processing of public information by short sellers. Further, a negative relation between pre-announcement short selling and post-announcement short-term stock returns exists for stocks with less short sale constraints. We also find moderate evidence associating short selling with subsequent bankruptcy to some extent. Overall, these results suggest that short sellers front run going concern announcements based on private information and fundamentals, although trading constraints prevent them fully impounding the severity of negative information in the short run, providing a partial explanation for the long-run price drift post-going concern.
Keywords: Going concern audit opinion, Short sale, Informed trading, Short sale constraints
JEL Classification: G12, G14, M42
Suggested Citation: Suggested Citation