Short Selling: A Review of the Literature and Implications for Future Research

Posted by ARC Commitee - Sep 25, 2020

Our article accepted for publication in the European Accounting Review (EAR) special issue on literature reviews in accounting provides a systematic review of short selling literature on its information intermediary roles and its influence on accounting, auditing, and other corporate decisions. Our review also identifies some gaps in the short-selling literature and highlights a few inherent challenges that researchers face in their research designs.


Short sales occur for a myriad of reasons that roughly fall into either informed or uninformed short-selling categories. Short sellers’ belief that the stock is overvalued based on fundamental analysis motivates informed short selling (e.g. Dechow, Hutton, Meulbroek, & Sloan, 2001). To conduct informed trading, short sellers rely on the underlying economics or fundamentals of different stocks in stock selection (e.g. Dechow et al., 2001; Desai, Ramesh, Thiagarajan, & Balachandran, 2002; Engelberg, Reed, & Ringgenberg, 2012)and/or simply follow a momentum-based strategy (Curtis & Fargher, 2014; Lamont & Stein, 2004). We focus on this strand of the literature because it pertains to information acquisition and distribution, highlighting short selling’s profound implications for economic decisions and financial reporting.


Research reveals short sellers’ price discovery roles and highlights their ability to exploit public information to facilitate their financial statement analysis and stock valuation. Extending this traditional literature, recent studies further advance our knowledge, showing substantial private information acquisition by short sellers prior to negative information events (e.g. the public revelation of financial misconduct, the announcement of accounting restatements, stock downgrades, bond rating downgrades, and so on). With an improved research design and the availability of high-frequency daily short-trading data around specific corporate news events, this stream of literature provides direct evidence on (i) the types of negative news on which short sellers trade; (ii) the precise timing of the trading; and (iii) short sellers’ ability to profit from the specific event-based trading strategy.


Meanwhile, a new stream of literature explores whether short-selling interests affect corporate decision making. For example, managers react to short-selling pressure by modifying their financing and investing decisions (Grullon, Michenaud, & Weston, 2015) and improving managerial compensation pay-for-performance sensitivity (DeAngelis, Grullon, & Michenaud, 2017). In a similar vein, studies demonstrate that managers attempt to improve their financial reporting quality in the presence of high short interest. Collectively, this stream of literature recognizes the dynamic interactions between short sellers as market participants and corporate financing, investing, contracting, and financial reporting decisions.


Our review highlights that, although short sellers use both private information and public information in selecting stocks for shorting, we know little about how they use private and non-financial information to influence managerial economic decisions and firms’ financial reporting decisions. In discussing potential future research, we emphasize that penetrating the information ‘black box’ and positioning research regarding the information that short sellers use and how they use it are necessary to advance the short-selling literature.


Read more about our review at

To cite this article: Jiang, H., Habib, A., & Hasan, M. M. (2020). Short Selling: A Review of the Literature and Implications for Future Research. European Accounting Review.


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