Short Selling and Readability in Financial Disclosures: A Controlled Experiment
43 Pages Posted: 8 Aug 2017 Last revised: 24 May 2022
Date Written: May 24, 2022
We examine the causal effect of short-selling on a firm’s annual report readability using Regulation SHO, which relaxes short-sale constraints for a random sample of pilot stocks. Pilot firms’ annual report readability are significantly lower than that for the non-pilot firms during the experiment period. Our results are more pronounced for firms that receive less investor attention. Furthermore, pilot firms increase the use of uncertainty words in annual reports during the experiment period. Our results suggest that firms produce less transparent financial disclosures that are more costly for investors to comprehend when short-sale constraints are less rigorous.
Keywords: Regulation SHO; Short-selling; Annual report readability; Limited attention
JEL Classification: G14; G18; M41
Suggested Citation: Suggested Citation