SEC Comment Letter Disclosures and Short Sellers’ Front-Running

The Accounting Review, Forthcoming

59 Pages Posted: 23 Dec 2022

See all articles by Sam (Sunghan) Lee

Sam (Sunghan) Lee

Iowa State University; Iowa State University - Department of Accounting and Finance

Zhejia Ling

California State University, Fullerton

Zabihollah Rezaee

University of Memphis - School of Accountancy

Date Written: November 27, 2022

Abstract

Prior studies show that comment letters released by the Securities and Exchange Commission provide information on firms’ financial reporting quality and can have adverse value implications about the firms. We examine whether short sellers front-run comment letter disclosures and take short positions based on the economic implications of the letters. We find that short interest increases before comment letter disclosures and that the increase is positively associated with the severity of the letters. We also find evidence suggesting that short sellers obtain private information through social connections with corporate insiders. Finally, we document a negative but delayed market reaction to the disclosure of severe comment letters. These results suggest that front-running the comment letter disclosure is not the optimal trading strategy for short sellers. Short sellers can gain similar profits, and bear less risk, if they put off increasing their short positions until after the disclosure.

Keywords: SEC comment letters, short selling, social connections

JEL Classification: G32, M40

Suggested Citation

Lee, Sam (Sunghan) and Ling, Zhejia and Rezaee, Zabihollah, SEC Comment Letter Disclosures and Short Sellers’ Front-Running (November 27, 2022). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4300405

Sam (Sunghan) Lee

Iowa State University ( email )

Gerdin Building 3323
Ames, IA 50010
United States

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Zhejia Ling (Contact Author)

California State University, Fullerton ( email )

School of Accountancy
College of Business and Economic
Fullerton, CA California 92834
United States

Zabihollah Rezaee

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901-678-4652 (Phone)

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