The invisible hand of short selling: Does short selling discipline earnings management?

Author

Massimo MASSA
Bohui ZHANG
Hong ZHANG, Singapore Management UniversityFollow

Publication Type

Journal Article

Version

publishedVersion

Publication Date

6-2015

Abstract

We hypothesize that short selling has a disciplining role vis-a-vis firm managers that forces them to reduce earnings management. Using firm-level short-selling data for thirty-three countries collected over a sample period from 2002 to 2009, we document a significantly negative relationship between the threat of short selling and earnings management. Tests based on instrumental variable and exogenous regulatory experiments offer evidence of a causal link between short selling and earnings management. Our findings suggest that short selling functions as an external governance mechanism to discipline managers.

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

Publication

Review of Financial Studies

Volume

28

Issue

6

First Page

1701

Last Page

1736

ISSN

0893-9454

Identifier

10.1093/rfs/hhu147

Publisher

Oxford University Press (OUP): Policy F - Oxford Open Option D

Citation

MASSA, Massimo; ZHANG, Bohui; and ZHANG, Hong. The invisible hand of short selling: Does short selling discipline earnings management?. (2015). Review of Financial Studies. 28, (6), 1701-1736.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7054

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

External URL

https://doi.org/10.1093/rfs/hhu147