رشته های مرتبط مدیریت، اقتصاد
گرایش های مرتبط مدیریت کسب و کار، اقتصاد مالی
مجله امور مالی تجاری و حسابداری – Journal of Business Finance & Accounting
دانشگاه University ofMassachusetts Boston – United States
منتشر شده در نشریه وایلی
کلمات کلیدی انگلیسی corporate governance, earnings quality, real earnings management, short selling
1 INTRODUCTION Short sellers have been viewed in the academic literature as well-informed and sophisticated investors (e.g., Diamond & Verrecchia, 1987).1 In particular, several studies provide evidence that short sellers identify overvalued firms that have engaged in accruals management.2 Yet managers also engage in real earnings management (REM), a practice that has become prevalent and that brings more severe consequences than accrual-based earnings management (e.g., Cohen & Zarowin, 2010; Cohen, Dey, & Lys, 2008). Since REMʼs negative implications for future performance tend to be incorporated into stock prices with a delay,3 short sellers likely have incentives to target firms engaging in REM. Despite the substitutive relation between accrual-based earnings management and REM (e.g., Zang, 2012), we know very little about whether short sellers also monitor REM or ignore it, thereby potentially encouraging managers to switch to REM. My goal is to provide evidence of the level of sophistication in short sellersʼ response to managersʼ abnormal operating decisions. More specifically, I examine whether and how short interest is related to a firmʼs REM as compared to other fundamental signals identified by prior studies. Doing so provides a more complete picture of short sellersʼ monitoring of the overall quality of corporate earnings. Short selling refers to the sale of a stock by an investor who does not own it but borrows it from other investors in anticipation of profiting from a price decline. Given the high costs associated with short positions, short sellers have strong incentives to identify overpriced firms, thereby facilitating the incorporation of unfavorable information into market prices. A number of studies suggest that short sellers are sophisticated investors by providing evidence that their positions predict future returns (e.g., Asquith, Pathak, & Ritter, 2005; Desai, Ramesh, Thiagarajan, & Balachandran, 2002) and that short-selling constraints result in prices that do not fully reflect negative information (e.g., Boehme, Danielsen, & Sorescu, 2006; Jones & Lamont, 2002). Short sellers tend to target firms that are overpriced relative to fundamentals (e.g., Curtis & Fargher, 2014; Dechow, Hutton, Meulbroek, & Sloan, 2001). In particular, several studies examine whether short sellers consider overpricing associated with poor earnings quality in their decision process by focusing on accruals. For example, Hirshleifer, Teoh, and Yu (2011) provide evidence that short interest is positively associated with accruals, suggesting that short sellers exploit the accrual anomaly Earnings quality has been identified as a critical element in capital markets. Prior research suggests that managers manipulate reported earnings by changing accounting methods or estimates used to represent their operating activities.4 However, short-term-focused financial reporting behavior is not limited to manipulating accounting practices. To artificially boost short-term reported earnings, managers can change the timing or structuring of real operations. This practice, also known as REM, has received considerable attention (e.g., Cohen & Zarowin, 2010; Cohen et al., 2008; Roychowdhury, 2006; Zang, 2012). For example, managers may cut prices or extend more lenient credit terms to accelerate sales into the current period. They may overproduce to decrease cost of goods sold (COGS) to meet their earnings targets in the current period. Given the different nature between accrual-based earnings management and REM, prior evidence of short sellersʼtrading on accruals information does not necessarily provide an answer about whether short sellers also monitor and respond to managersʼ abnormal operating decisions.