Short Selling Prior to Going Concern Disclosures

56 Pages Posted: 12 Jan 2021

See all articles by Jian Huang

Jian Huang

Towson University - College of Business and Economics

Lei Wang

Shanghai University of International Business and Economics - School of Finance

Han Yu

Southern CT University - Department of Finance

Zhen Zhang

Towson University - Department of Accounting

Date Written: September 26, 2020

Abstract

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

Huang, Jian and Wang, Lei and Yu, Han and Zhang, Zhen, Short Selling Prior to Going Concern Disclosures (September 26, 2020). Available at SSRN: https://ssrn.com/abstract=3699863 or http://dx.doi.org/10.2139/ssrn.3699863

Jian Huang

Towson University - College of Business and Economics ( email )

8000 York Road
Towson, MD 21252
United States
410-704-3547 (Phone)
410-704-3454 (Fax)

Lei Wang (Contact Author)

Shanghai University of International Business and Economics - School of Finance ( email )

Shanghai
China

Han Yu

Southern CT University - Department of Finance ( email )

New Haven, CT 06515
United States

Zhen Zhang

Towson University - Department of Accounting ( email )

Towson University
8000 York Road
Towson, MD Maryland 21252
United States

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