The impact of short sale prospect on income smoothing

Xu Sun and Tianming Zhang

Review of Accounting and Finance, 2023, vol. 22, issue 1, 62-83

Abstract: Purpose - The purpose of this paper is to examine the impact of short sale prospect on future income smoothing. Design/methodology/approach - This study examines how short sale prospect impacts future income smoothing. This study follows prior research and uses two measures of income smoothing. One is the correlation between the change in prediscretionary income and the change in discretionary accruals. The other is the variability of earnings relative to the variability of cash flows. Findings - This study finds that short sale prospect has a negative impact on future income smoothing. This finding is robust to use different measures of short sale prospect and income smoothing and to subsample tests. Additional analysis reveals that short sale prospect, by curbing income smoothing, reduces future stock price crash risk. Originality/value - To the best of the authors’ knowledge, this study is the first to examine the impact of short selling on firms’ subsequent smoothing of reported income. This study contributes to the earnings quality literature by demonstrating the governance role of short selling on future earnings smoothness.

Keywords: Income smoothing; Short selling; Stock price crash risk; Stock market; Capital market; Corporate finance; Earnings quality and management (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-01-2022-0020

DOI: 10.1108/RAF-01-2022-0020

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