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Presenter: Alejandro Lopez-Lira, University of Florida
Discussant: Matthew Ringgeberger, University of Utah
Abstract:
Firms mentioned in short-sell research reports significantly reduce their real investment and stock issuances. Each report is associated with an average reduction of corporate investment equal to $118 million and stock issuances equivalent to $179 million. Reports allocate a large percentage of the text commenting on accounting fraud and earnings mismanagement. We attribute the real effects to a substantial increase in the cost of capital despite the clear negative cash-flow news implications. Target firms earn average abnormal returns of -4% on the publication day, and the subsequent price revisions equal -8% in 12-months horizon. In contrast, cash-flow expectations decrease even more sluggishly, increasing the cost of capital implied by standard dividend-discount models. Firms that commit accounting frauds without short-seller research reports mentioning it do not have a significant price correction or a decrease in investment.