Short sellers and the informativeness of stock prices with respect to future earnings

Drake, Michael S.; Myers, James N.; Myers, Linda A.; Stuart, Michael D.

doi:10.1007/s11142-014-9313-8

Cited by 40 publications

(13 citation statements)

References 61 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Short sellers benefit the market and play a crucial role in enhancing market efficiency through improving the extent to which current stock prices reflect information about future earnings (Drake, Myers, Myers, & Stuart, 2015). 4 Dechow, Hutton, Meulbroek, and Sloan (2001) find that short sellers are able to use information contained in fundamental ratios such as earnings and book values to take positions in stocks with lower expected future returns.…”

Section: Short Sellingmentioning

confidence: 99%

Short Selling and Corporate Tax Avoidance

Guo¹,

Chi²,

Cook³

2018

Advances in Taxation

View full text Add to dashboard Cite

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms' stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

show abstract

Section: Short Sellingmentioning

confidence: 99%

Short Selling and Corporate Tax Avoidance

Guo¹,

Chi²,

Cook³

2018

Advances in Taxation

View full text Add to dashboard Cite

show abstract

“…Ayers and Freeman () find that high institutional ownership and analyst following are each positively associated with FERCs. Other studies find that FERCs are positively associated with the trades of short sellers (Drake et al., ) and insiders (Crawford, Park, & Roulstone, ).…”

Section: Related Research and Empirical Questionmentioning

confidence: 89%

“…Prior research suggests that activities of sophisticated market participants, such as institutional investors, short sellers and analysts, accelerate the pricing of future earnings information (e.g., Ayers & Freeman, ; Drake et al., ). We consider the possibility that policy uncertainty only influences firms with poor information environments rather than a broad cross‐section of the market.…”

Section: Primary Empirical Testsmentioning

confidence: 99%

“…First, we contribute to the literature that investigates factors influencing the relationship between current returns and future earnings. Prior research finds that disclosure quality (Choi et al., ; Lundholm & Myers, ), reporting standards (Ettredge et al., ; Hsu & Pourjalali, ), analysts and institutional investors (Ayers & Freeman, ), and short sellers (Drake, Myers, Myers, & Stuart, ) all bring the future forward by influencing the extent to which prices reflect future earnings information. To our knowledge, however, this is the first study to examine a factor that pushes the future back by decreasing the extent to which prices reflect future information.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

Drake

Mayberry

Wilde

2018

Business Fin & Account

Self Cite

View full text Add to dashboard Cite

We examine whether policy uncertainty triggered by presidential elections pushes the future back by reducing the extent to which current prices reflect information about future earnings. We estimate future earnings response coefficients (FERCs) for the years 1975–2013, a period that covers ten presidential elections. We find that FERCs are significantly lower (by 11.8%) during presidential election years compared to other years. Additional analyses using pseudo election years, ex‐ante polls, contract prices from the Iowa Electronic Political Market, and cross‐sectional firm characteristics provide corroborating evidence that the lower FERCs during election years are related to policy uncertainty. We also investigate potential explanations for the lower FERCs during election years. We find that the lower FERCs relate to forecasting difficulty rather than to changes in the discount rate or in the amount of noise trading. Finally, we find that market prices move toward future earnings to a greater degree during presidential election years compared with other years once the policy uncertainty is resolved. A trading strategy based on this drift yields significant abnormal returns. Overall, we contribute to the literature by providing the first empirical evidence that shocks to policy uncertainty influence the pricing of earnings information.

show abstract

“…Although the media and some regulators claim that short selling causes an unwarranted downward spiral in stock price (e.g., Karpoff & Lou, ; Drake, Myers, Myers, & Stuart, ), these claims are largely based on anecdotal evidence.…”

mentioning

confidence: 99%

Earnings quality and short selling: Evidence from real earnings management in the United States

Park

2017

Business Fin & Account

View full text Add to dashboard Cite

Prior research provides evidence consistent with managers using real earnings management (REM) to increase earnings. This study examines whether short sellers exploit the overvaluation of firms employing REM. I find that firms with more REM have higher subsequent short interest. The positive relation between REM and short interest is more pronounced in settings where the costs associated with accrual-based earnings management are high, such as when a firm has low accounting flexibility or faces greater scrutiny from a high quality auditor. I also find some evidence that short sellers respond to REM more than to other fundamental signals of firm overvaluation. My inferences are robust to the use of propensity score matching. Collectively, my evidence suggests that short sellers not only trade on REM information, but they also trade as if they understand the substitutive nature of alternative earnings management methods. This study provides additional insight into the important role that short sellers play in monitoring managerial operating decisions and overall earnings quality.

show abstract

Short sellers and the informativeness of stock prices with respect to future earnings

Cited by 40 publications

References 61 publications

Short Selling and Corporate Tax Avoidance

Short Selling and Corporate Tax Avoidance

Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

Earnings quality and short selling: Evidence from real earnings management in the United States

Contact Info

Product

Resources

About