Short-Selling Threats and Corporate Tax Policy: Evidence from Regulation SHO

Posted: 3 Dec 2020 Last revised: 26 Jan 2021

See all articles by Johan Maharjan

Johan Maharjan

Rensselaer Polytechnic Institute (RPI)

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Yijiang Zhao

American University - Kogod School of Business

Date Written: November 2, 2020

Abstract

This study examines the effect of short-selling threats on tax aggressiveness. The SEC’s Regulation SHO pilot program relaxed short-selling constraints for a sample of U.S. stocks, thus leading to an exogenous increase in short-selling threats for these pilot stocks. After controlling for non-randomization of treatment and control firms, we find that pilot firms experienced a significant decrease in tax aggressiveness in the during-pilot period, relative to non-pilot firms. We further find that the effect is stronger when firms are more opaque, when CEOs have greater job-security concerns, and when CEOs’ equity portfolios are more sensitive to share prices. Our findings suggest that short-selling threats, which facilitate the flow of bad news into share prices and thus dampen the price inflation, reduce managers' incentive to use aggressive tax policies as an earnings manipulation tool to inflate share prices.

Keywords: tax-aggressive activities, short-selling threats, agency problems, price efficiency, exogenous shock

JEL Classification: H20, G34, M41

Suggested Citation

Maharjan, Johan and Omer, Thomas C. and Zhao, Yijiang, Short-Selling Threats and Corporate Tax Policy: Evidence from Regulation SHO (November 2, 2020). Available at SSRN: https://ssrn.com/abstract=3736133 or http://dx.doi.org/10.2139/ssrn.3736133

Johan Maharjan

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

Thomas C. Omer (Contact Author)

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Yijiang Zhao

American University - Kogod School of Business ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States
202-885-1941 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
543
PlumX Metrics