Abstract
This paper studies the interaction between short selling and earnings management (misreporting). I show informed short selling and uninformed short selling play different interaction roles. Ex post, informed short selling facilitates the detection of misreporting, whereas uninformed short selling distorts the detection of misreporting. Ex ante, short selling can affect the manager's choice of misreporting level. The main conclusions of this paper are as follows: (1) Whether uninformed short selling should be banned can depend on the trade-off between the ex-ante reduction in misreporting and the ex-post increase in distortion; (2) banning informed short selling may reduce misreporting, but always reduces firm value.
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