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

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.

Keywords: short selling, transparency, investor behavior, stock market efficiency

JEL Classification: G14, G15, G23