Do Short Sellers Exacerbate or Mitigate Managerial Myopia? Evidence from Patenting Activities
48 Pages Posted: 18 Jan 2014 Last revised: 16 Sep 2016
Date Written: September 15, 2016
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: Suggested Citation