Short Selling Pressure, Stock Price Behavior, and Management Forecast Precision: Evidence from a Natural Experiment
55 Pages Posted: 7 Nov 2014 Last revised: 14 Mar 2015
Date Written: November 5, 2014
Using a natural experiment (Regulation SHO), we show that short selling pressure and consequent stock price behavior have a causal effect on managers’ voluntary disclosure choices. Specifically, we find that managers respond to a positive exogenous shock to short selling pressure and price sensitivity to bad news by reducing the precision of bad news forecasts. This finding on management forecasts appears to be generalizable to other corporate disclosures. In particular, we find that, in response to increased short selling pressure, managers also reduce the readability (or increase the fuzziness) of bad news annual reports. Overall, our results suggest that maintaining the current level of stock prices is an important consideration in managers’ strategic disclosure decisions.
Keywords: Regulation SHO, short selling, corporate disclosure, forecast precision, annual report readability, managerial incentives
JEL Classification: D82, G14, G18, M41
Suggested Citation: Suggested Citation