The Informational Role of Short Sellers: The Evidence from Short Sellers’ Reports on US‐Listed Chinese Firms |
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| Authors: | Lei Chen |
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| Affiliation: | The author is from Southwestern University of Finance and Economics, Chengdu, China. This paper has benefited from comments and suggestions from two anonymous referees, Norman Strong (the editor), Stefano Cascino, Tao Chen, Abe de Jong, Paul Gillis, Paul Healy, Gilles Hilary, Bjorn Jorgensen, Christian Leuz, Troy Pollard, Peter Pope, Henri Servaes, Zhe Shen, Paul Smeets, Ane Tamayo, Paul Tetlock, Ann Vanstraelen, Martin Walker, and participants of seminars at the London School of Economics and Political Science (LSE), Maastricht University, Ozyegin University, Center for China's Governmental Auditing Research at SWUFE, 2014 UTS Emerging Accounting Researcher Consortium, 2015 Asian Finance Association Annual Meeting, 2015 IFABS China conference, and 2015 China Finance Annual Conference. A substantial amount of the work was done when I was affiliated with the LSE. I thank Di Wang for his excellent research assistance. This research is supported by the National Natural Science Foundation of China (Grant No. 71502143). All errors remain my own. An earlier version of this paper was circulated under the title ‘The Informational Role of Internet‐Based Short Sellers’. (Paper received January 2015, revised version accepted September 2016). |
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| Abstract: | Using US‐listed Chinese firms as the setting, this paper studies a novel channel through which investors can acquire information about firms’ financial reporting quality, that is, the reports published voluntarily by short sellers. I find that short sellers tend to target firms that have financial reporting red flags and that exhibit ‘good’ operating performance and stock valuations. Targeted firms experience an average three‐day cumulative abnormal return (CAR) of ?6.4%, and ?13.6% for initial coverage of the firm, and the CARs are more negative when the reports allege more severe misconduct of the firms. Non‐targeted firms also experience losses in value following short seller reports, especially when they hire the same non‐Big 4 auditors as targeted firms and when their earnings quality is poor. In comparison, analysts fail to perform proper due diligence and are much less effective than short sellers in exposing misreporting risk in Chinese firms. |
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| Keywords: | short seller reports US‐listed Chinese firms reporting quality equity analysts G14 G38 M41 M48 |
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