The Informativeness of Short Sellers: An Insider's Perspective

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.