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

32 Pages Posted: 25 Dec 2004  

Hemang Desai

Southern Methodist University - Cox School of Business

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Kumar Venkataraman

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: December 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 2004). Available at SSRN: https://ssrn.com/abstract=633283 or http://dx.doi.org/10.2139/ssrn.633283

Hemang Desai (Contact Author)

Southern Methodist University - Cox School of Business ( email )

Cox School of Business
6212 Bishop Blvd.
Dallas, TX 75275-0333
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) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States
214-768-7005 (Phone)
214-768-4099 (Fax)

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

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