Short Selling Around Restatement Announcements: When Do Bears Pounce?

This article draws on two distinct literatures-one that investigates the impact of accounting restatements and another that investigates the trading behavior of short sellers-to further our understanding of how sophisticated investors process and respond to news about accounting corrections. We examine short-seller behavior in the days surrounding restatement announcements to determine when short sellers identify restatements and how they trade on restatement news. Our findings suggest that short sellers do not appear to anticipate restatement announcement dates, but we find that abnormal short selling is significantly higher than is typical when restatements are announced, especially for restatements announced transparently (i. e., in press releases or 8-Ks). Short sellers target small companies, whose information environments may be weaker, and companies making restatements that reduce previously reported income. In addition, we find that restating companies targeted most heavily by short sellers experience the most negative subsequent abnormal returns over horizons of up to 40 trading days following the restatement disclosure. Overall, our results suggest that short sellers respond to, but do not anticipate, restatement announcements and trade as if they understand the post-announcement stock price implications of restatement disclosures.