Title

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

Publication Date

12-25-2004

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.

Document Type

Article

Keywords

Short sellers, Accruals, Earnings quality, Earnings restatements

Disciplines

Finance

DOI

10.2139/ssrn.633283

Source

SMU Cox: Finance (Topic)

Language

English

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