lets you profit from a fall in a share price, so whoever uses it goes looking for negative information about the company. The American securities regulator temporarily lifted the restriction on such selling for about a third of , which created a comparison group. What happened to those companies’ reporting?
Less massaging of the numbers. Compared with companies left out of it, the companies in the group showed less and fewer arbitrary accounting adjustments, and less narrow beating of profit targets. Frauds that had begun earlier were detected more often, and share prices reflected earnings information faster. This is evidence that scrutiny by critical investors can affect how companies behave.
This is a : under a pilot program a price restriction on short selling was removed from a sample of shares, while other shares stayed under the previous rule.
The authors compared companies before the experiment, during it and after it. In the period of relief, measures of profit adjustment and of marginal forecast-beating fell in the pilot group.
Detection of fraud that had begun before the experiment also became more likely, and share prices responded better to earnings information. The pattern fits an increase in scrutiny by investors.
When the pilot ended, some of the measures returned to their earlier levels. It remains to be examined which market conditions allow a similar effect to hold, and how it is balanced against other risks.
wat. When it is easier to examine a company and profit from exposing its weaknesses, it is harder to hide weaknesses in the accounts.
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A market mechanism sometimes seen as a negative bet may also make it harder to conceal financial information.
How do we know?
A policy experiment in 2005–2007 compared companies whose short-selling restriction was eased with similar companies outside the test group.
What is still unknown
The experiment ran in the American market in a defined period. It does not follow that lifting any short-selling restriction would improve reporting in any market.
Learn something?
Where to next
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