Board interlock networks and informed short sales

47 Pages Posted: 10 Jan 2022

See all articles by Shijun Cheng

Shijun Cheng

Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University

Robert Felix

Catholic University of America (CUA) - Busch School of Business and Economics

Yijiang Zhao

American University - Kogod School of Business

Date Written: November 6, 2018

Abstract

This study examines the association between informed short selling and a firm’s position in the board interlock network formed by shared directors. We find that better-connected firms experience higher levels of informed short selling and that this association is driven by both eigenvector centrality (a measure that accounts for both the quantity and quality of firms’ ties) and betweenness centrality (a measure of the extent to which firms serve as information intermediaries), not by degree centrality (a measure that only counts the quantity of their ties) in interlock networks. In addition, the positive association between interlock centrality and informed trading is more pronounced for firms whose directors have more opportunities to interact with directors of external firms in the network, consistent with director information leakage serving as a plausible underlying channel. Our further tests do not support an alternative interpretation based on short sellers’ superior processing of public information. Our findings have policy implications for regulators and professional director associations.

Keywords: board interlock networks, centrality, director information leakage, short sales

JEL Classification: G14, G18, G30, M41

Suggested Citation

Cheng, Shijun and Felix, Robert and Zhao, Yijiang, Board interlock networks and informed short sales (November 6, 2018). Journal of Banking and Finance, Vol. 98, 2019, Available at SSRN: https://ssrn.com/abstract=4002719

Shijun Cheng

Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University ( email )

211 West Huaihai Road
Shanghai, 200030
China

Robert Felix

Catholic University of America (CUA) - Busch School of Business and Economics ( email )

620 Michigan Avenue, NE
Washington, DC 20064
United States

Yijiang Zhao (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States
202-885-1941 (Phone)

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