Accounting conservatism and short selling: Evidence from China

Abstract

Using China's short-selling pilot program as a quasi-experiment, we find that the prospect of short selling has significantly increased conditional accounting conservatism among firms that are eligible for short selling, consistent with a short sellers' disciplining effect hypothesis. When short selling takes position ex post, accounting conservatism starts to decrease with an increased downward pressure on stock prices. Moreover, the short-selling effect of increased conditional accounting conservatism becomes stronger for stateowned enterprises, and this effect is accompanied by an increase of unconditional conservatism. As corroborating evidence to support the disciplining hypothesis, we show that accounting conservatism is significantly decreased for firms that are removed from the shortselling eligibility list. Our results are robust after considering the endogeneity issue in measuring downward stock price pressure, and after constructing the control firms by using both a propensity score matching method and an alternative measure for accounting conservatism. Overall, we provide important evidence on the feedback effects that the capital market has on firm financial reporting.

Short selling and labor investment efficiency: evidence from the Chinese stock market

“…The real effects of short selling have attracted much attention from academia and practitioners around the world, especially during the post‐crisis period. Existing empirical research in this field focuses primarily on financial reporting (e.g., Massa et al ., 2015; Fang et al ., 2016; Jin et al ., 2018) and capital investment (e.g., Grullon et al ., 2015), and it is less clear whether and how short selling affects firms' labor investment decisions. In this paper, we fill this gap by focusing on the relation between short selling and the efficiency of labor investments.…”

“…Second, this paper contributes to the literature on the real effects of short selling (e.g., Karpoff and Lou, 2010; Grullon et al ., 2015; Fang et al ., 2016), especially in the Chinese context (Ni and Zhu, 2016; Li et al ., 2018; Chen et al ., 2018b; Jin et al ., 2018; Luo et al ., 2020; Ni and Yin, 2020; Zhang et al ., 2020). Specifically, we combine two prior theoretical studies on short selling (Khanna and Mathews, 2012) and stakeholder relations (Almazan et al ., 2017) and provide empirical evidence for their arguments.…”

The influence of the deregulation of short‐selling on related‐party transactions: Evidence from China

“…Recent studies report the prominent evidence on the information advantages and the ensuing benefits of short-selling activities in China. For instance, lifting the short-selling ban in China is accompanied by a lower cost of equity, fewer earnings management, higher market liquidity, and higher investment efficiency of the shortable stocks (Hu et al, 2019), an increase in financial-reporting conservatism (Jin et al, 2018), and an enhancement in corporate philanthropic activities (Hou et al, 2019). Collectively, the findings of recent short-selling studies provide evidence that short-sellers play a monitoring role in Chinese stock markets, supporting the government's effort of deregulating short-selling activities.…”

“…For instance,Jian and Wong (2010) sample A-shares from 1998-2002 and have only one firm from banking and financial Institutions. Published short-selling empirical studies have also excluded financial firms in their analysis (e.g.,Desai et al, 2006;Hu et al, 2019;Jin et al, 2018).TA B L E 1…”

Short‐selling and cost of equity: evidence from China

“…Depressed stock prices due to short selling can engender great losses to large shareholders, who have strong incentives to strengthen internal control, such as increasing the board of directors' supervision and curbing opportunistic managerial behaviour, which may be exposed by short sellers. 2 Further, reputational and monetary losses should also encourage managers to be more self-disciplined, which can improve firms' investment efficiency (Gustavo et al, 2015;Jin et al, 2015), enhance disclosure quality (Li and Zhang, 2015) and increase accounting conservatism (Jin et al, 2018). Massa et al (2015) document supporting evidence that short selling indeed improves corporate governance.…”