Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices

60 Pages Posted: 14 Jul 2016

See all articles by Stephan Jank

Stephan Jank

Deutsche Bundesbank; University of Cologne - Centre for Financial Research (CFR)

Christoph Roling

Deutsche Bundesbank

Esad Smajlbegovic

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Multiple version iconThere are 2 versions of this paper

Date Written: 2016

Abstract

This paper analyzes how newly introduced transparency requirements for short positions affect investors' behavior and security prices. Employing a unique data set, which contains both public positions above and confidential positions below the regulatory disclosure threshold, we offer several novel insights. Positions accumulate just below the threshold, indicating that a sizable fraction of short sellers are reluctant to disclose their positions publicly. Furthermore, we provide evidence that the transparency measures effectively represent a short-sale constraint for secretive investors, which results in stocks to be overpriced. Specifically, when this constraint is potentially binding, stocks subsequently exhibit a negative abnormal return of 1.0-1.4% on a monthly basis. Different placebo tests verify that the short-sale constraint originates from the disclosure threshold. Overall, these findings suggest that short sellers' evasive behavior in response to the transparency regulation imposes a negative externality on stock market efficiency.

Keywords: short selling, transparency, investor behavior, stock market efficiency

JEL Classification: G14, G15, G23

Suggested Citation

Jank, Stephan and Roling, Christoph and Smajlbegovic, Esad, Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices (2016). Bundesbank Discussion Paper No. 25/2016, Available at SSRN: https://ssrn.com/abstract=2809498

Stephan Jank (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Christoph Roling

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Esad Smajlbegovic

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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

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