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

Hemang Desai (), Srinivasan Krishnamurthy and Kumar Venkataraman
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Hemang Desai: Southern Methodist University
Srinivasan Krishnamurthy: SUNY – Binghamton University
Kumar Venkataraman: Southern Methodist University

Review of Accounting Studies, 2006, vol. 11, issue 1, No 4, 90 pages

Abstract: 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. 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 information being conveyed by accruals.

Keywords: Short sellers; Accruals; Earnings quality; Earnings restatements (search for similar items in EconPapers)
JEL-codes: D82 G14 M41 (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s11142-006-6396-x

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