Post by Sapphire Capital on Sept 5, 2008 20:30:07 GMT 4
Do Short Sellers Detect Overpriced Firms? Evidence from SEC Enforcement Actions
Jonathan M. Karpoff
University of Washington - Michael G. Foster School of Business
Xiaoxia Lou
University of Delaware
August 1, 2008
EFA 2008 Athens Meetings Paper
AFA 2008 San Francisco Meetings Paper
Abstract:
We examine short selling in the stocks of firms that subsequently are identified by the SEC as having misrepresented their financial statements, and report three findings. First, abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed. The amount of this increase and the level of short interest immediately before public revelation are positively related to the severity of the misrepresentation. Second, the speed with which misrepresentation is publicly revealed is positively related to the level of short interest. And third, there is no evidence that short interest facilitates a downward price spiral when bad news hits the market. To the contrary, short selling decreases the amount by which prices are inflated by these firms' misrepresentations, thus limiting uninformed investors' losses when they purchase shares during the misrepresentation period. Overall, this evidence indicates that short sellers anticipate the eventual discovery and severity of financial misconduct. Short selling also conveys external benefits to uninformed investors, by helping to detect financial misconduct and by keeping prices closer to fundamental values during periods in which firms provide incorrect financial information.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1218068_code17129.pdf?abstractid=1102853&mirid=1
Jonathan M. Karpoff
University of Washington - Michael G. Foster School of Business
Xiaoxia Lou
University of Delaware
August 1, 2008
EFA 2008 Athens Meetings Paper
AFA 2008 San Francisco Meetings Paper
Abstract:
We examine short selling in the stocks of firms that subsequently are identified by the SEC as having misrepresented their financial statements, and report three findings. First, abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed. The amount of this increase and the level of short interest immediately before public revelation are positively related to the severity of the misrepresentation. Second, the speed with which misrepresentation is publicly revealed is positively related to the level of short interest. And third, there is no evidence that short interest facilitates a downward price spiral when bad news hits the market. To the contrary, short selling decreases the amount by which prices are inflated by these firms' misrepresentations, thus limiting uninformed investors' losses when they purchase shares during the misrepresentation period. Overall, this evidence indicates that short sellers anticipate the eventual discovery and severity of financial misconduct. Short selling also conveys external benefits to uninformed investors, by helping to detect financial misconduct and by keeping prices closer to fundamental values during periods in which firms provide incorrect financial information.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1218068_code17129.pdf?abstractid=1102853&mirid=1