Short seller monitoring and real earnings management

Abstract

Exploiting an exogenous shock to short selling costs brought by the RegSHO, we find that short seller monitoring restrains real earnings management (REM). The effect is concentrated in firms facing a lower cost of REM than accruals management. Litigation risk and reduced CEO wealth gain from REM are two plausible channels through which short seller monitoring deters REM. Lastly, we find that short interests on stocks of treated firms increase after the announcement of the RegSHO relative to that on stocks of control firms, and the increase is concentrated in the subsample of treated firms with signs of REM.