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

Massimo Massa, Bohui Zhang, Hong Zhang

Research output: Contribution to journalArticlepeer-review

78 Citations (Scopus)

Abstract

We hypothesize that short selling has a disciplining role vis-à-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.

Original languageEnglish
Pages (from-to)1701-1736
Number of pages36
JournalReview of Financial Studies
Volume28
Issue number6
DOIs
Publication statusPublished - 1 Jun 2015
Externally publishedYes

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