Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling?
51 Pages Posted: 10 Dec 2014 Last revised: 11 Dec 2014
Date Written: December 9, 2014
We study how the presence of short sellers affects the incentives of the insiders to trade on negative information. We show it induces insiders to sell more (shares from their existing stakes) and trade faster to preempt the potential competition from short sellers. An experiment and instrumental variable analysis confirm this causal relationship. The effects are stronger for “opportunistic” (i.e., more informed) insider trades and when short sellers’ attention is high. Return predictability of insider sales only occurs in stocks with high short-selling potential, suggesting that short sellers indirectly enhance the speed of information dissemination by accelerating trading by insiders.
Keywords: Short Selling, Insider Trading, Informed Trader, Market Efficiency
JEL Classification: G14, M41
Suggested Citation: Suggested Citation