Does Mandatory Short Selling Disclosure Lead to Investor Herding Behavior?

46 Pages Posted: 16 Sep 2021 Last revised: 15 Aug 2023

See all articles by John C. Heater

John C. Heater

Duke University - Fuqua School of Business

Ye Liu

Fudan University

Qin Tan

City University of Hong Kong (CityU)

Frank Zhang

Yale School of Management

Date Written: August 14, 2023


Prior literature documents that short sale activity clusters around mandated short sale position disclosures. We investigate two competing, yet non-mutually exclusive, hypotheses for this finding: herding- versus information-based trading. First, consistent with herding-based trading, we find that future firm-level short interest exhibits a significantly smaller reversal for stocks that had short-sale disclosures than for non-disclosure stocks using an entropy-balanced sample. More importantly, the cumulative abnormal stock returns after the disclosure are lower for disclosure stocks relative to non-disclosure stocks in the short run but recover over time. The recovery in stock prices for disclosure stocks is in line with the initial excessive short-selling pressure abating and fundamental investors buying the dip, a result consistent with herding-based trading. Second, we explore the role of new information about firm fundamentals on short selling activities and find that the degree of short-sale disclosure clustering is similar across the pre-earnings announcement, post-earnings announcement, and no-news periods, regardless of whether the earnings news is good or bad, suggesting that information shocks are not driving short-sale disclosure clustering. Overall, the evidence is consistent with short sellers herding into short positions after observing short-sale disclosures.

Keywords: Short sale, herding, disclosure, firm fundamentals, stock returns

JEL Classification: G12, G14, G41, M41

Suggested Citation

Heater, John C. and Liu, Ye and Tan, Qin and Zhang, Frank, Does Mandatory Short Selling Disclosure Lead to Investor Herding Behavior? (August 14, 2023). Available at SSRN: or

John C. Heater

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1085 (Phone)


Ye Liu

Fudan University ( email )

670 Guoshun Rd
Shanghai, Shanghai 200433

Qin Tan

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Hong Kong

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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