Short-Selling Mechanism and Earnings Management in Supply Chains: Evidence from Network Spillovers_Vol. 3 No. 3 (JEL 2026)_Journal of Economics and Law (ISSN: 3005-5768)

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Short-Selling Mechanism and Earnings Management in Supply Chains: Evidence from Network Spillovers

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DOI: https://doi.org/10.62517/jel.202614303

Author(s)

Junyi Cheng

Affiliation(s)

IBSS, Xi’an Jiaotong-Liverpool University, Suzhou, Jiangsu, China

Abstract

This study investigates the spillover effects of short-selling mechanism on corporate earnings management within supply chain networks. While prior literature predominantly focuses on the direct governance effects of short selling at the firm level, we extend this perspective by examining how such external governance pressures propagate through inter-firm economic linkages. Using a comprehensive sample of Chinese A-share listed firms from 2010 to 2025 and exploiting the staggered implementation of the margin trading and securities lending (MTSS) system, we construct a novel measure of firms’ exposure to short-selling mechanism via their supply chain partners. Our findings reveal a significant and positive relationship between short-selling exposure of focal firms and earnings management among their supply chain peers, suggesting a “defensive spillover effect” whereby connected firms increase opportunistic reporting in response to heightened uncertainty and reputational concerns. Further analyses show that this effect is moderated by supply chain dependence and internal governance: the spillover is more pronounced among highly dependent firms and those with stronger governance structures, highlighting heterogeneous behavioral responses to external shocks. These results challenge the conventional view of short selling as a uniformly beneficial governance mechanism and underscore the importance of considering network structures in understanding corporate financial reporting behavior. Overall, this study contributes to the literature by integrating insights from corporate governance, supply chain networks, and earnings management, and by providing new evidence on how external market forces shape firm behavior beyond organizational boundaries.

Keywords

Short Selling; Earnings Management; Supply Chain Networks; Governance Spillovers; External Governance; China Capital Market; MTSS System

References

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