Short-selling, Discretionary Accruals, and Earnings Management

Description

Previous studies show that short sellers can identify and discipline earnings management (Karpoff and Lou (2010), Fang et al. (2015), Massa et al. (2015), and Lu (2018)). The purpose of the proposed project is to establish that because of the difficulty in distinguishing earnings management from discretionary accruals, short selling may reduce managers’ willingness to communicate private information on financial statements. Therefore, short selling may reduce the amount of information available in the stock market. The project will contribute to the literature on the controversy around short selling.