Insider Sales under the Threat of Short Sellers: New Hypothesis and New Tests

Using the Regulation SHO program as a quasi-experiment, we document that the threat of short selling has a negative effect on the volume of opportunistic insider selling and a positive effect on its profitability for each transaction. These effects are stronger among firms with higher litigation risk, greater media coverage, and executives who have more of their firms’ stock-related holdings. We further find robust evidence when we extend the analyses to short selling deregulations in the Chinese and Hong Kong stock exchanges. Overall, our findings suggest that short sellers play a disciplinary role in opportunistic insider selling.

Keywords: Regulation SHO, short selling, insider trading, disciplining hypothesis, crowding-out hypothesis

JEL Classification: D8, D53, G14, G18

Suggested Citation: Suggested Citation

Wang, Kemin and Wang, Rencheng and Wei, Kuo-Chiang (John) and Zhang, Bohui and Zhou, Yi, Insider Sales under the Threat of Short Sellers: New Hypothesis and New Tests (April 9, 2018). Singapore Management University School of Accountancy Research Paper No. 2021-139, Available at SSRN: https://ssrn.com/abstract=2724532 or http://dx.doi.org/10.2139/ssrn.2724532