Accounting Conservatism and Short Selling: Evidence from China

43 Pages Posted: 17 Apr 2018

See all articles by Jin Zhi

Jin Zhi

Southwestern University of Finance and Economics (SWUFE)

Bingxuan Lin

University of Rhode Island

Xue Yang

National Sun Yat-sen University

Ting Zhang

University of Dayton - School of Business Administration

Date Written: March/April 2018

Abstract

Using China's short‐selling pilot program as a quasi‐experiment, we find that the prospect of short selling has significantly increased conditional accounting conservatism among firms that are eligible for short selling, consistent with a short sellers’ disciplining effect hypothesis. When short selling takes position ex post, accounting conservatism starts to decrease with an increased downward pressure on stock prices. Moreover, the short‐selling effect of increased conditional accounting conservatism becomes stronger for state‐owned enterprises, and this effect is accompanied by an increase of unconditional conservatism. As corroborating evidence to support the disciplining hypothesis, we show that accounting conservatism is significantly decreased for firms that are removed from the short‐selling eligibility list. Our results are robust after considering the endogeneity issue in measuring downward stock price pressure, and after constructing the control firms by using both a propensity score matching method and an alternative measure for accounting conservatism. Overall, we provide important evidence on the feedback effects that the capital market has on firm financial reporting.

Keywords: accounting conservatism, accrual, difference‐in‐difference, disciplining effect, downward stock pressure, propensity score matching, short selling

Suggested Citation

Zhi, Jin and Lin, Bingxuan and Yang, Xue and Zhang, Ting, Accounting Conservatism and Short Selling: Evidence from China (March/April 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 3-4, pp. 352-394, 2018, Available at SSRN: https://ssrn.com/abstract=3163913 or http://dx.doi.org/10.1111/jbfa.12302

Jin Zhi (Contact Author)

Southwestern University of Finance and Economics (SWUFE)

Bingxuan Lin

University of Rhode Island

Xue Yang

National Sun Yat-sen University

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan

Ting Zhang

University of Dayton - School of Business Administration ( email )

300 College Park
Dayton, OH 45469
United States

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