Does Short Selling Improve Analyst Forecast Quality?
55 Pages Posted: 14 Dec 2014 Last revised: 23 Mar 2020
Date Written: March 12, 2020
We examine the effect of short selling on analyst forecast quality. Using the removal of the tick test from Regulation SHO, we find that increased ease of short selling improves analyst earnings forecast quality. Examining underlying mechanisms for the improvement, the evidence is consistent with increased incentives for analysts to uncover bad news, and reductions in information asymmetry. In addition, the remaining members of the Russell 3000 also experienced an increase in forecast quality upon the permanent removal of the tick test for all firms. Our paper provides new evidence on the effect of short sellers on analyst behavior.
Keywords: Analyst forecast, short sellers, information environment
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