Short seller report and stock performance Empirical evidence from US-listed Chinese firms

Abstract

In recent years, there have been a number of Chinese companies listing in the US market. At the same time, many of them delist from the US market. An important reason behind this is the issue of financial fraud. Most of these cases are due to short seller reports by activist short sellers. After short selling, financial and auditing problems are revealed, causing the share prices of these companies to collapse. This has raised concerns among US regulators about the quality of Chinese companies' auditing and prompted joint supervision by Chinese and US regulators. This paper uses Chinese companies listed in the US as samples to study the long and short term fluctuations of these companies' stock prices before and after the short seller reports were issued. After the short seller reports are released, the results show that the stock price can fall significantly in the short term, with the average CAR reaching 10%. Long term share prices are less affected, with 45% of short seller reports associating with negative price changes. This paper also examines the factors that influence the market's reaction to short seller reports. Companies that choose the accounting firms from the Big 4 see smaller share price declines in the short run compared to those that do not. In addition, small companies are more likely to recover from such negative events in the long run than large ones. The study of short selling reports is important. Some limitations and restrictions make it difficult for US regulators to fully monitor all Chinese companies. Therefore, individual investors can only obtain information through these short-selling reports, and then change their investment decisions to protect their interests.