Abstract:
Using a firm-level dataset from 2006 to 2014 in China, this research examines the impact of short selling on the behavior of corporate financial restatement. After controlling for possible endogeneity issues with a placebo test and a Difference-in-Differences approach, we document a negative, causal effect from short selling to the probability of corporate financial restatement. We further find that the effect is more pronounced for firms with weaker corporate governance and for firms from regions with less developed financial market. A robust check further confirms the previous findings, where we use both accruals and whether the firm has reported a small positive profit as additional measures for earnings quality. Moreover, we find a more efficient incentive mechanism and more analyst coverage are among possible underlying channels through which short selling affects the behaviors of managers as wellas wrporate's financial restatement. This research calls for a relaxation to short selling to foster a stable equity market in China.
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