Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling?

51 Pages Posted: 10 Dec 2014 Last revised: 11 Dec 2014

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Wenlan Qian

National University of Singapore - NUS Business School

Weibiao Xu

National University of Singapore (NUS)

Hong Zhang

Tsinghua University - PBC School of Finance

Date Written: December 9, 2014

Abstract

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

Massa, Massimo and Qian, Wenlan and Xu, Weibiao and Zhang, Hong, Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling? (December 9, 2014). Journal of Financial Economics (JFE), Forthcoming; INSEAD Working Paper No. 2014/63/FIN. Available at SSRN: https://ssrn.com/abstract=2535809

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Wenlan Qian

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

Weibiao Xu

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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