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Short Selling and Earnings Management: A Controlled Experiment

The Journal of finance (New York), 2016-06, Vol.71 (3), p.1251-1294 [Peer Reviewed Journal]

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Title:
Short Selling and Earnings Management: A Controlled Experiment
Author: FANG, VIVIAN W. ; HUANG, ALLEN H. ; KARPOFF, JONATHAN M.
Subjects: Analytical forecasting ; Capital expenditures ; Coefficients ; Control groups ; Creative accounting ; Earnings ; Earnings forecasting ; Earnings management ; Efficiency ; Fraud ; Pilot projects ; Prices ; Short sales ; Stock prices ; Stock sales ; Studies ; United States
Is Part Of: The Journal of finance (New York), 2016-06, Vol.71 (3), p.1251-1294
Description: During 2005 to 2007, the SEC ordered a pilot program in which one-third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from shortsale price tests. Pilot firms' discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre-experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.
Publisher: Cambridge: Blackwell Publishing Ltd
Language: English
Identifier: ISSN: 0022-1082
EISSN: 1540-6261
DOI: 10.1111/jofi.12369
CODEN: JLFIAN
Source: Alma/SFX Local Collection

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