Short Selling Pre-deterrence And Corporate Earnings Management Strategy

In order to improve the stock market trading system and give full play to the effectiveness of the capital market,China Securities Regulatory Commission officially launched the pilot business of securities margin trading mechanism on March 31 2010,which means that China has officially introduced a short selling mechanism,investors could short sell stocks that are eligible for margin trading to gain profits.As an essential part of financial innovation,short selling mechanism could improve the pricing efficiency of the stock market and enhance the efficiency and effectiveness of resource allocation in the capital market,but also affect the information delivery between managers,major shareholders and investors.Therefore,it will affect the degree of information asymmetry under the principal-agent relationship,thus affecting the corporate's decision on earnings management.At present,many governance mechanisms for constraining earnings management behavior are designed based on mitigating information asymmetry of shareholders and managers.The emergence of short-selling deterrence has broadened the information mining channels to investors,which can alleviate the degree of information asymmetry to a certain extent,meanwhile can bring low-tolerance pressure on performance to the corporate through possiblely stock price decline feedback,which will have some influences on the corporate's accruals or real earnings management decisions.As an important stakeholder in the corporate governance structure,the largest shareholder will rationally measure the costs and benefits of earnings management under the two types of principal-agent problems,futher more the substitution effect of two types of earnings management may be considered to select the earnings management strategy,when under the short-selling deterrence.Besides,as an information broker in the external market,analysts play an important role in the transfer of information between companies and investors,and have an impact on the earnings management of managers and corporate.When relieving the short selling constraint provides more incremental information,and the analyst's information disclosure decision-making environment is more complicated,whether the analyst's information role and supervision role will affect the effect of short selling deterrence brings on earnings management strategy,is worth exploring.This paper is based on the principal-agent theory and information asymmetry theory,the effective market theory related to short selling mechanism,and the limited attention theory related to analysts' fellowing power.Using the quasi-natural experiment of China's securities margin trading mechanism,and selecting 20,889 observation samples from China's Shanghai and Shenzhen A-share listed companies in 2007-2017,starting from a perspective of shortselling's pre-deterrent effect,and studying it's relationship with two types of earnings management selection strategy.Firstly,empirically examines the relationship between short selling deterrence and earnings management strategy by multi-time point DID model.Secondly,from the perspectives of internal governance and external information environment,the paper further examines the impact of internal largest shareholder governance and external analyst information intermediary on the relationship between short-selling and corporate earnings management strategy.Finally,testing the results of the studies for endogenous and robustness by PSM-DID,placebo test,and replacing variables methods.This paper finds that that short-selling deterrence significantly inhibite the accrued earnings management and increase the real earnings management of the companies that are subject to securities lending,explaining that short-selling deterrence cannot completely restrict the earnings management behavior of listed companies,but promotes its selection effect in two types of earnings management strategy.This selection effect is more prominent in companies with higher shareholding ratio of largest shareholder,the governance of large shareholders has intensified the selection effect of short-selling deterrence making on earnings management strategy.The influence of analysts fellowing power could weaken the selection effect of short-selling deterrence making on earnings management strategy,which will significantly reduce the degree of real earnings management of the securities companies.The main contributions of this paper are: Firstly,finding the short selling deterrence has a selection effect on accrual and real earnings managements strategy.Secondly,results of this paper partially support the external governance mechanism of short selling,meanwhile finds the negative effects of short selling on corporate behaviour,providing a new research perspective for the effectiveness of short selling mechanism corporate governance.Thirdly,constructing a new ‘Analyst Following Power' indicator to make the measurement of analyst following power more comprehensive and representative,providing a new perspective and evidences for a comprehensive understanding of the effectiveness of the external supervisory forces.