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

Author

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  • Hemang Desai

    (Southern Methodist University)

  • Srinivasan Krishnamurthy

    (SUNY – Binghamton University)

  • Kumar Venkataraman

    (Southern Methodist University)

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.

Suggested Citation

  • Hemang Desai & Srinivasan Krishnamurthy & Kumar Venkataraman, 2006. "Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements," Review of Accounting Studies, Springer, vol. 11(1), pages 71-90, March.
    • Handle: RePEc:spr:reaccs:v:11:y:2006:i:1:d:10.1007_s11142-006-6396-x
    DOI: 10.1007/s11142-006-6396-x
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    References listed on IDEAS

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    Cited by:

    1. Michael S. Drake & James N. Myers & Linda A. Myers & Michael D. Stuart, 2015. "Short sellers and the informativeness of stock prices with respect to future earnings," Review of Accounting Studies, Springer, vol. 20(2), pages 747-774, June.

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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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