Short Selling Threat and Real Activity Manipulation: Evidence from a Natural Experiment

• In Event: Various Topics in Accounting

Abstract

In this paper we investigate whether and how short selling threat affects real activity manipulation. Using a regulatory experiment (Regulation SHO) that removes short selling restrictions on randomly selected pilot firms, we find that real activity manipulation is significantly reduced for pilot firms in response to increased short selling threat during the experiment period. The reduction effect is stronger for pilot firms with defender business strategy and pilot firms with more transparent financial reporting strategy. Using a Dupont analysis, we further find that pilot firms decrease profitability, but increase asset management efficiency. Our finding confirms short sellers’ monitoring effect on opportunistic behavior, even for real activity manipulation that is difficult to detect.

Author

• Huimin Chen, Rensselaer Polytechnic Institute