Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements

Review of Accounting Studies (2006) 11:71-90

32 Pages Posted: 25 Dec 2004 Last revised: 11 Feb 2021

See all articles by Hemang Desai

Hemang Desai

Southern Methodist University (SMU) - Accounting Department

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: December 1, 2004

Abstract

We study the behavior of short sellers around earnings restatements. We find that short sellers accumulate positions in restating firms several months in advance of the restatement and subsequently unwind these positions after the drop in share price induced by the restatement. The increase in short interest is larger for firms with high levels of accruals prior to restatement, and the association between short interest and accruals is robust to controlling for other factors that affect the shorting decision. We document that heavily shorted firms experience poor subsequent performance and a higher rate of delisting. Overall, these results suggest that the motive for short selling is, at least in part, related to suspect financial reporting and that short sellers pay attention to the same type of information that is being conveyed by accruals.

Keywords: Short sellers, Accruals, Earnings quality, Earnings restatements

JEL Classification: G12, M41, M43, M49

Suggested Citation

Desai, Hemang and Krishnamurthy, Srinivasan and Venkataraman, Kumar, Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements (December 1, 2004). Review of Accounting Studies (2006) 11:71-90, Available at SSRN: https://ssrn.com/abstract=633283 or http://dx.doi.org/10.2139/ssrn.633283

Hemang Desai (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3185 (Phone)
214-768-4099 (Fax)

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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