The Differential Impact of Short Selling on Earnings Management

This study examines the differential impact of short selling on two types of earnings management: accrual-based and real earnings management. The empirical results indicate that higher short-selling intensity is associated with an increase in accrual-based earnings management and a decrease in real earnings management. These results suggest that short selling may induce accrual-based earnings management, but real earnings management–potentially detrimental to long-term firm value–is constrained by the disciplinary effect of short sellers. Additional analyses on information asymmetry provide limited evidence that information asymmetry moderates the relationship between short selling and earnings management. Furthermore, the effects of short selling do not differ significantly between domestic and foreign short sellers. These findings suggest that the effects of short selling are more likely driven by broad market mechanisms rather than by the information advantages of short sellers or firm-specific information environments. This study sheds new light on the external effects of short selling and the role of short sellers in the Korean market.