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Capital market frictions and conservative reporting: Evidence from short selling constraints

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  • Young, Alex

Abstract

I use a natural experiment, Reg SHO, that relaxed short selling constraints on a random sample of U.S. stocks to study how capital market frictions affect conditional conservatism in financial reporting, defined as earnings reflecting bad news more quickly than good news. Since reducing short selling constraints increases the sensitivity of stock prices to bad news, managers may decrease conditional conservatism to delay the recognition of bad news in earnings. However, if equity investors anticipate this, then they may demand an increase in conditional conservatism such that there is no net effect. With a difference-in-differences design, I find that a decrease in short selling constraints causes a decrease in conditional conservatism. The result improves our understanding of how market regulation affects accounting choices and suggests that relaxing equity market frictions can have potentially negative consequences for financial reporting quality.

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  • Young, Alex, 2016. "Capital market frictions and conservative reporting: Evidence from short selling constraints," Finance Research Letters, Elsevier, vol. 17(C), pages 227-234.
    • Handle: RePEc:eee:finlet:v:17:y:2016:i:c:p:227-234
    DOI: 10.1016/j.frl.2016.03.016
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    Cited by:

    1. Wang, Shuxun & Zhang, Dongyang, 2020. "Short-selling restrictions and firms’ environment responsibility," Research in International Business and Finance, Elsevier, vol. 54(C).
    2. Jiang, Haiyan & Jia, Jing, 2021. "Short selling and future cash flow predictability of capital investment: Evidence from Australia," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(1).
    3. Ge-zhi Wu & Da-ming You, 2021. "Margin trading, short selling and corporate green innovation," Papers 2107.11255, arXiv.org, revised Aug 2021.
    4. Zhang, Wei, 2024. "Short-selling constraints and firm-level climate change exposure: Evidence from utility firms," Economics Letters, Elsevier, vol. 237(C).

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