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

• DOI: 10.2308/tar-2018-0196
• Publication Date: 2021-03-24T23:08:49Z
• Authors: Kemin Wang; Rencheng Wang; K. C. John Wei; Bohui Zhang; Yi Zhou
• Keywords: Finance and Financial Management; short selling; Accounting; 0502 economics and business; 05 social sciences; Regulation SHO; disciplining hypothesis; insider trading; crowding-out hypothesis; 004

ABSTRACT 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. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D8; D53; G14; G18.