Short Selling and Earnings Management

Question: Discuss about the Short Selling and Earnings Management. Answer: Introduction: The overall essay mainly depicts the measures taken by financial market regulators worldwide to impose short selling restrictions on financial securities. In addition, the high volatility is been witnessed in the capital market during 2008 recession, which was mainly due to the use of short selling. Recently China has been imposing restriction on short selling for reducing the negative impact it could have on its Shanghai index. During recession major countries in the world imposed restriction on short selling, as investors to make high-end gains used it. Moreover, with the help of adequate findings, journals and examples adequate impact of short selling on volatility of the market can be identified. Body content: Short selling bans are used by most of the countries all around the world to reduce the liquidity of some stocks, due to augmentation of a bad news. In addition, so far counties like US, China, India, Singapore, Australia, UK and other European counties have effectively used the short selling ban system to their advantage for reducing liquidity from the market. Moreover, the short selling bans was widely imposed during the financial cries of 2008, as it allowed short sellers to profit from the declining market and inflict greater damage to the venerable capital market. As depicted in wall street journal, when the world was burring in 2008 financial crisis, handful of short selling traders was able to make huge profit from it On the other hand, Beber and Pagano (2013) criticises that ban on short selling is reduce by countries for keeping a check on market bubbles, inflated price discovery, upward market manipulation. Many researchers mainly conducted the study on benefits for banning the short selling process. The results mainly indicated that discontinuation of short selling process instigated inflated prices and market bubble, which was more dangerous for the countrys economy. However, after evaluating different countries capital market and regulations against short selling relevant point could be understood. Firstly, the short selling ban is mainly initiated if the exchange or capital market wants to reduce the liquidity condition of the stock or security. However, the restrictions successfully achieve their purpose to curb excess stock price volatility. As with the help of short selling investor were able to borrow and trade securities by paying a small premium on the shares. In addition, short selling could only be conducted if shares are been borrowed from other investors and then provided to them after commencements of the trading. In this context, Boehmer, Jones and Zhang (2013) mentioned that China has effectively controlled the short selling pressure in the Shanghai market for continuing the growth of their capital market. On the other hand, Fang, However, the relevant theories and studies have been conducted to understand the signification of short selling process and its ban to support adverse market conditions. The ban on short selling during the recession of 2008 mainly helped in halting the declining share prices and index. However, Chang, Luo and Ren (2014) stated that ban on short selling mainly slowed its intensity of the decline, but the share price still continued to plunge. overall difference in stock having short selling ban and vice-versa could be evaluated. This mainly indicated that stocks having short selling ban had less volatility in comparison to stock having no short selling ban However, after the expiry of short selling ban on stocks it declined exponentially, which depicts that short selling ban is an effective measure used by regulators to curb excess volatility. Kolasinski, Reed and Thornock (2013) mentioned that ban on short selling is mainly essential for barring the investors to use undue advantage, which could negatively reflect on the share price. The use of short selling ban during 2008 recession was mainly helpful for US to curb the excess volatility in the market and support the declining share price. On the other hand, Jain et al. (2013) criticises that implementation on short selling ban only slowed the decline but share price continued to decline. After the overall ban expire price volatility has relatively increased, which indic ates that it helps in controlling the overall volatility in the market. Figure 2 (Appendix 2) mainly depicts the ban on short selling, which was conducted on DAX and IBEX during 2012. This ban on short selling mainly helped in reducing the overall volatility in the market and increased performance of DAX and IBEX. The significance of short selling could be seen from the overall figure 2, as it mainly helped in reducing the excess volatility and increased price action of DAX and IBEX. Brogaard, Hendershott and Riordan (2016) stated that ban on naked short selling has been an effective measure to reduce the overall worse condition, which could arise in the market. On the other hand, Bohl, Klein and Siklos (2014) criticises that short selling is an effective measure to reduce inflated price and derive the actual valuation of the stock. Furthermore, the overall figure 3 (Appendix 3) mainly depicts the relevant impact on ban of short selling on SP 500. After the implementation of short selling ban, overall price of SP mainly declined gradually over the period. However, before that short selling mainly decline the prices of the index more rapidly. Moreover, the impact on short selling ban mainly lost its friction, which in turn reduces ability of the regulators to curb the declining price. Nonetheless, volatility in the market was reduced as it barred the short sellers from contributing to the decline price of SP 500. Beber and Pagano (2013) argued that ban on short selling could inflate the overall share price of companies, which in turn could be more drastic as actual value could not be detected. Conclusion: The overall assignment mainly depicts the implication of short selling ban on volatility of the market. Moreover, the study mainly evaluates the short selling ban conducted in recession 2008 and 2012. These bans are mainly evaluated to understand the implication of short selling and how these bans could effectively reduce volatility in the marketHowever, it did not stop the normal traders to dispose their position of the stock. Moreover, it could be understood that ban mainly slowed the fall in the market, as short sellers are not able to conduct their trades. Thus, it could be understood that ban in short selling could effectively help in reducing the overall volatility it the market and help regulators to reduce excess volatility. Reference: Beber, A. and Pagano, M., 2013. Short?selling bans around the world: Evidence from the 200709 crisis.The Journal of Finance,68(1), pp.343-381. Boehmer, E., Jones, C.M. and Zhang, X., 2013. Shackling short sellers: The 2008 shorting ban.Review of Financial Studies, p.hht017. Bohl, M.T., Klein, A.C. and Siklos, P.L., 2014. Short-selling bans and institutional investors' herding behaviour: Evidence from the global financial crisis.International Review of Financial Analysis,33, pp.262-269. Brogaard, J., Hendershott, T. and Riordan, R., 2016. High frequency trading and the 2008 short sale ban. Chang, E.C., Luo, Y. and Ren, J., 2014. 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