Do Corporate Managers Trade Against Short Sellers?

Abstract

Motivated by the significant capital allocated to repurchasing stock and its potential affect on price discovery, we develop an empirical model of changes in corporate stock repurchases. We find that share price, capital availability, dividend policy, firm size, and operating profitability significantly influence quarterly stock repurchases, but our novel discovery is that managers trade against shorts by increasing (decreasing) repurchases in response to an increase (decrease) in short sales. This practice appears to violate SEC regulations that stock price be set by “independent market forces without undue influence by the issuer.” We also empirically model insider trading, finding that insiders buy and sell with the shorts, with little attention to the amount of shares being repurchased. Managers therefore trade with shorts when using their personal capital, but against them with corporate capital.

Keywords: short selling, stock repurchases, insider trading