Do Short Sellers Exacerbate or Mitigate Managerial Myopia? Evidence from Patenting Activities

48 Pages Posted: 18 Jan 2014 Last revised: 16 Sep 2016

Jie He

University of Georgia - Department of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: September 15, 2016

Abstract

We examine whether short sellers exacerbate or mitigate managerial myopia by using a firm’s patenting activities to capture managers’ myopic behavior. To establish causality, we use exogenous variation in short-selling costs generated by a quasi-natural experiment, Regulation SHO, which removes the tick restriction on a randomly-chosen subsample of Russell 3000 firms. We find that the quality, value, and originality of patents generated by treatment firms improve significantly more than control firms surrounding Regulation SHO, suggesting that short sellers are able to mitigate managerial myopia in investment decisions. The exposure to patenting-related litigation initiated by short sellers is a plausible mechanism through which short sellers curb myopic behavior, and managers of more opaque firms voluntarily disclose more information about their innovation activities in response to such litigation risk. Our paper provides new insights into a surprising and unintended real effect of short sellers – their mitigation of managerial myopia.

Keywords: Managerial myopia; Patenting; Short selling; Regulation SHO; Litigation risk

JEL Classification: G14, G18, O31, O32

Suggested Citation

He, Jie and Tian, Xuan, Do Short Sellers Exacerbate or Mitigate Managerial Myopia? Evidence from Patenting Activities (September 15, 2016). The 2016 American Finance Association Meetings Paper; 27th Annual Conference on Financial Economics and Accounting Paper. Available at SSRN: https://ssrn.com/abstract=2380352 or http://dx.doi.org/10.2139/ssrn.2380352

Jie He (Contact Author)

University of Georgia - Department of Finance ( email )

424 Brooks Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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