Executive Summary:
We investigate whether short sellers target firms with poor earnings quality. For a sample of firms that restated their earnings, we document that short sellers steadily accumulate positions in the two years prior to the restatement announcement and subsequently cover their positions. The increase in short interest is larger for firms with high level of accruals prior to restatement. For firms in the highest tercile based on total accruals, the short interest increases from 2.44% to 3.87% over the two year period. We decompose total accruals into its components and show that the increase in short interest is significantly positively related to less reliable and less persistent accruals. These results are consistent with accruals being an important part of the information set of sophisticated market participants.
Key words: Short sellers, earnings quality and accruals mis-pricing. |
