Accounting Comparability and Short Selling Interest

Abstract

We study how accounting comparability affects short selling interest. We show that low comparability induces more short interest, and this negative relation is more pronounced among “seemingly fine firms”: firms of which their financial statements appear to have favorable fundamental qualitative characteristics, and their financial analysis ratios do not indicate overvaluation. Our findings suggest that short sellers suspect seemingly faithful but incomparable financial information as deceptive, i.e., resulting from corporate managers opportunistically deviating from benchmark accounting methodology to map bad economic events to “healthy looking” earnings attributes and financial ratios. We further show that ex-ante short selling pressure forces corporate managers to enhance comparability. Overall, short sellers have the ability to detect and constrain bad news hidden behind incomparable financial statement.

Speaker

Professor Agnes Cheng, The Hong Kong Polytechnic University

Research Interests:

• Auditing
• Behavioural economics, finance, and accounting
• Corporate disclosure
• Corporate governance and compensation