The purpose of this paper is to empirically examine whether corporate insiders extract information from activity of outsiders, specifically the short sellers.
Using portfolio approach and Fama-MacBeth regressions, this study examines the relation between short interest and subsequent insider trading activities.
The following results are reported. First, there is a strong inverse relation between short selling and subsequent insider trading, which is partially due to common private information and same target firm characteristics. Second, insiders extract information from shorts. This information extraction effect is more pronounced for firms whose insiders have stronger incentives to extract shorts information (insider purchases, higher short sale constraints, and better information environments). Third, during the September 2008 shorting ban, the information extraction affect disappeared among the large banned firms, whose shorting activities were distorted.
The findings contradict the of-cited accusations corporate executives hold against short sellers. Instead, corporate insiders appear to trade in the same direction as suggested by shorting activities.
Among the vocal critics of short sellers are corporate insiders, who allege that short sellers beat down their stock prices. Many corporations even engage in stock repurchases to show confidence that the stock will perform well going forward despite the short sellers’ actions. This paper’s analysis on their personal portfolios suggests the other way around.
By focusing on how corporate insider trading is related to shorts information, this paper sheds new light on whether corporate decisions convey the true information the corporate insiders possess.
The authors thank Warren Bailey, Paul Gao, Byoung Hwang, Andrew Karolyi, Ken Merkley, Pam Moulton, Rick Sias, Scott Yonker, and seminar participants at the Cornell University for helpful suggestions. All errors are that of the authors. All opinions and inferences are attributable to the authors and do not represent the views of the T. Rowe Price Associates, Inc.
Gao, G., Ma, Q. and Ng, D. (2018), "The informativeness of short sellers: an insider’s perspective", China Finance Review International, Vol. 8 No. 4, pp. 354-386. https://doi.org/10.1108/CFRI-08-2017-0193Download as .RIS
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