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The impact of short sale prospect on income smoothing

Xu Sun (Department of Finance and Economics, Woodbury School of Business, Utah Valley University, Orem, Utah, USA)
Tianming Zhang (Department of Accounting, College of Business, Florida State University, Tallahassee, Florida, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 6 January 2023

Issue publication date: 25 January 2023

308

Abstract

Purpose

The purpose of this paper is to examine the impact of short sale prospect on future income smoothing.

Design/methodology/approach

This study examines how short sale prospect impacts future income smoothing. This study follows prior research and uses two measures of income smoothing. One is the correlation between the change in prediscretionary income and the change in discretionary accruals. The other is the variability of earnings relative to the variability of cash flows.

Findings

This study finds that short sale prospect has a negative impact on future income smoothing. This finding is robust to use different measures of short sale prospect and income smoothing and to subsample tests. Additional analysis reveals that short sale prospect, by curbing income smoothing, reduces future stock price crash risk.

Originality/value

To the best of the authors’ knowledge, this study is the first to examine the impact of short selling on firms’ subsequent smoothing of reported income. This study contributes to the earnings quality literature by demonstrating the governance role of short selling on future earnings smoothness.

Keywords

Citation

Sun, X. and Zhang, T. (2023), "The impact of short sale prospect on income smoothing", Review of Accounting and Finance, Vol. 22 No. 1, pp. 62-83. https://doi.org/10.1108/RAF-01-2022-0020

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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