Does Accounting Conservatism Deter Short Sellers?
43 Pages Posted: 6 Jul 2014 Last revised: 19 Mar 2017
Date Written: July 26, 2017
Abstract
We examine the impact of the corporate information environment on short selling by testing the relationship between short interest and accounting conservatism. Short interest, the total number of shares shorted and not yet covered, is a widely used measure of short selling activity. Accounting conservatism, on the other hand, represents the timelier recognition of bad versus good news in earnings, and is widely acknowledged as a vital accounting property and a contributor to transparency and efficient contracting in firms. We reason that conservatism lowers information asymmetry and decreases expected returns to short sellers and hypothesize a negative relation between short interest and measures of conservatism. Our results are consistent with this hypothesis and we verify findings using a variety of conservatism measures including those indicated in the recent literature (e.g., Dutta and Patatoukas 2017).
Keywords: Short selling, conservatism, Investor behavior
JEL Classification: G1, M41
Suggested Citation: Suggested Citation