Revealing Shorts: An Examination of Large Short Position Disclosures

Abstract:     
As a policy response to the recent financial crisis, France, Spain and the United Kingdom now require the disclosure of large short positions. We analyze these disclosures and the possibility of a triggering effect where one disclosure is followed by further disclosures in the same stock. The results are nuanced, but the bulk of the evidence suggests that short sale disclosures do not, in themselves, have unintended negative consequences. In our analysis, we find significant cumulative abnormal returns of -1.78% immediately following a short position disclosure. When the short position is associated with a rights issue, cumulative abnormal returns over the 30 days following a short position disclosure are -10.23%. This stock price effect is permanent, suggesting that disclosers are not manipulative but are simply well-informed, a finding consistent with Diamond and Verrecchia (1987). Outside of rights issues, we find that short position disclosures have little effect on share prices. Across the board, we find significant follow-on shorting activity: a large short position disclosure makes it much more likely that there will be another disclosure within a month in the same stock by a different short seller. Follow-on shorting is more likely when the initial discloser is large, and when follow-on disclosers are geographically close to the initial discloser. However, we find no evidence that total short interest increases after a disclosure, and we conclude that disclosures are not used as a signal for shorts to start piling on to drive down share prices. These findings shed light on the potential effects of short-sale disclosure regulation under consideration by the US Securities and Exchange Commission and by European regulators.

Number of Pages in PDF File: 60

Keywords: short sales, short interest, securities lending, secondary equity offering

JEL Classification: G14

working papers series