Can the short selling mechanism curb corporate financial fraud——Taking Muddy Waters Short Selling Huishan Dairy as an Example

Abstract

Integrity stands as the most valuable cornerstone of the market. Promoting the culture of integrity, establishing a long-term mechanism for integrity construction, and practicing honest management are fundamental prerequisites for the sustainable operation of enterprises. Financial fraud disrupts the entire market rules and integrity system, severely damaging the legitimate rights and interests of the public. This article analyzes the motives behind financial fraud in listed companies and highlights that the essence of such fraud reflects the will of the actual controllers of these companies. The motives behind financial fraud in listed companies need to be explored from both external and internal perspectives. The short selling mechanism can effectively curb financial fraud. Taking Muddy Waters’ short selling of Huishan Dairy as an example, this article introduces the process of Muddy Waters’ research and evidence collection regarding financial fraud at Huishan Dairy. As a result of short selling, Huishan Dairy paid a heavy price: the listed company was forced to delist, with a market value of 30 billion yuan vanishing. It was eventually reorganized, facing uncertain prospects. The findings of this case indicate that the short selling mechanism can effectively suppress corporate financial fraud, serving as a beneficial supplement to regulatory systems and a purifier that accelerates the exit of low-quality companies while protecting the legitimate rights and interests of investors.