Does Short-Selling Affect Accounting Conservatism?

Abstract

As the volume of short-selling transactions in the Korean capital market increases, so does the need to understand the impact of short-selling. This study examines the association between short-selling and financial reporting by analyzing the accounting conservatism of the target firms. By reflecting private bad news in stock prices, short-selling functions as a channel of information for market participants. Insiders can delay the announcement of bad news when short sellers are targeting a company to lessen the negative impact of the short-selling. This should manifest as a reduction in conditional conservatism in response to short-selling. Using the Basu (1997) model and a sample obtained from the Korean Stock Exchange, this study investigates this hypothesis. This study’s empirical findings support the hypothesis that short-selling reduces the accounting conservatism of the target firms. This phenomenon is more pronounced in firms with a poor information environment, as measured by factors such as firm size, analyst following, the presence of credit ratings, return volatility, board independence, and ownership structure. This implies that a firm’s strategy of countering short-selling through managing accounting conservatism is less likely to be effective in firms with a good information environment. © 2024, Korean Accounting Association. All rights reserved.