Does short selling reduce classification shifting?—— Exploration of market-oriented governance mechanism

Abstract

We empirically investigate the impact of short selling on classification shifting, exploiting the staggered lift of short-sale bans in China. Using a multi-period difference-in-difference research design, we find that the lift of short-sale bans mitigates the classification shifting. We also find that short selling alleviates the market's overpricing of the core earnings of firms engaging in classification shifting, thus reducing the expected benefits and motivations of firms for classification shifting. Further research shows that short selling has a more significant inhibitory effect on classification shifting in regions with developed financial intermediaries and it improves the persistence of core earnings.