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

S Jank, C Roling, Esad Smajlbegovic

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Abstract

We study how disclosure requirements for large short positions affect investor behavior and security prices. Short positions accumulate just below the applicable disclosure threshold as certain investors never disclose any of their positions. Further tests suggest that this secrecy is part of investors’ general policy of avoiding disclosure to protect their unique, profitable investment strategies against reverse engineering by competitors. No evidence supports the notion that short sellers avoid disclosure because of potential adverse effects on securities' lending fees, risk of recall, or short squeezes. Finally, the evasive behavior by short sellers in response to transparency regulations hampers price discovery.

Original languageEnglish
Pages (from-to)209-233
Number of pages25
JournalJournal of Financial Economics
Volume139
Issue number1
DOIs
Publication statusPublished - Jan 2021

Bibliographical note

Funding Information:
We are grateful to Wei Jiang (the referee) and Bill Schwert (the editor) for their valuable suggestions. We have also benefited from comments and suggestions from Puriya Abbassi, Vikas Agarwal, Karl Diether (discussant), Tim Eisert, Zsuzsa Husz?r (discussant), Rajkamal Iyer, Charles Jones (discussant), Jonathan Karpoff, Alexander Klos (discussant), Philipp K?nig, Christian Leuz, Jochen Mankart, Christoph Meinerding, Christoph Merkle (discussant), Emanuel Moench, Esteban Prieto, David Rakowski (discussant), Adam Reed (discussant), Zacharias Sautner, Christoph Schneider, G?nter Strobl, Pedro Saffi, Michael Ungeheuer, Patrick Verwijmeren, Verena Weick-Ludewig and Florian Weigert as well as seminar and conference participants at the Deutsche Bundesbank, the University of Mannheim, the University of Washington 2016 Summer Finance Conference, the 2016 Annual Meeting of the European Finance Association, the Fall 2016 National Bureau of Economic Research Asset Pricing Meeting, and the 2017 annual meeting of the American Finance Association. We thank Stefan Greppmair and Michael Schneider for excellent research assistance. We thank the German Federal Financial Supervisory Authority (Bundesanstalt f?r Finanzdienstleistungsaufsicht, BaFin) for providing the short position notification data. We take responsibility for all remaining errors. Financial support from the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG), Grant Number: JA-2396/1-1, is gratefully acknowledged. Esad Smajlbegovic acknowledges financial support from the Erasmus Research Institute of Management and the hospitality of the Deutsche Bundesbank Research Centre. This paper represents our personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank or the Eurosystem.

Funding Information:
We are grateful to Wei Jiang (the referee) and Bill Schwert (the editor) for their valuable suggestions. We have also benefited from comments and suggestions from Puriya Abbassi, Vikas Agarwal, Karl Diether (discussant), Tim Eisert, Zsuzsa Huszár (discussant), Rajkamal Iyer, Charles Jones (discussant), Jonathan Karpoff, Alexander Klos (discussant), Philipp König, Christian Leuz, Jochen Mankart, Christoph Meinerding, Christoph Merkle (discussant), Emanuel Moench, Esteban Prieto, David Rakowski (discussant), Adam Reed (discussant), Zacharias Sautner, Christoph Schneider, Günter Strobl, Pedro Saffi, Michael Ungeheuer, Patrick Verwijmeren, Verena Weick-Ludewig and Florian Weigert as well as seminar and conference participants at the Deutsche Bundesbank, the University of Mannheim, the University of Washington 2016 Summer Finance Conference, the 2016 Annual Meeting of the European Finance Association, the Fall 2016 National Bureau of Economic Research Asset Pricing Meeting, and the 2017 annual meeting of the American Finance Association. We thank Stefan Greppmair and Michael Schneider for excellent research assistance. We thank the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) for providing the short position notification data. We take responsibility for all remaining errors. Financial support from the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG), Grant Number: JA-2396/1-1, is gratefully acknowledged. Esad Smajlbegovic acknowledges financial support from the Erasmus Research Institute of Management and the hospitality of the Deutsche Bundesbank Research Centre. This paper represents our personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank or the Eurosystem.

Publisher Copyright:
© 2020 Elsevier B.V.

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