The Informativeness of Short Sellers: An Insider's Perspective

55 Pages Posted: 23 Sep 2015

See all articles by George Gao

George Gao

T. Rowe Price Group; Cornell University - Samuel Curtis Johnson Graduate School of Management

Qingzhong Ma

California State University, Chico

David T. Ng

Johnson College of Business

Date Written: September 21, 2015

Abstract

Among the vocal critics of short sellers are corporate insiders, who allege that short sellers beat down their stock prices. Many corporations even engage in stock repurchases to show confidence that the stock will perform well going forward despite the short sellers’ actions. In this paper, we analyze insiders’ trading actions in their personal portfolios. We document a strong inverse relation between short selling and subsequent insider trading, which is partially due to common private information and same target firm characteristics. Additionally, we find that insiders extract information from shorts. This information extraction effect is more pronounced for firms whose insiders have stronger incentives to extract shorts information (insider purchases, higher short-sale constraints, and better information environments). During the September 2008 shorting ban, the information extraction effect disappeared among the large banned firms, whose shorting activities were distorted. Our empirical evidence contradicts the oft-cited accusations corporate executives hold against short sellers.

Suggested Citation

Gao, George and Ma, Qingzhong and Ng, David T., The Informativeness of Short Sellers: An Insider's Perspective (September 21, 2015). Available at SSRN: https://ssrn.com/abstract=2663683 or http://dx.doi.org/10.2139/ssrn.2663683

George Gao

T. Rowe Price Group ( email )

Baltimore, MD 21202

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall 314
Ithaca, NY 14853
United States

Qingzhong Ma

California State University, Chico ( email )

325 Tehama Hall
Chico, CA 95929
United States

David T. Ng (Contact Author)

Johnson College of Business ( email )

301G Warren Hall, Cornell University
Ithaca, NY 14850-1967
United States
6072550145 (Phone)

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