Evidence That Short Pressure Affects Management Forecasts

Short-sellers come in for a lot of criticism: individual investors don’t like the idea of someone benefiting from their loss and most of the finance industry has an incentive to promote optimism and the trade activity that comes along with it. They defend the practice by saying that short selling improves price efficiency, but a recent study suggests that too much short pressure causes management to reduce precision of negative forecasts so that everyone has less relevant information to work with.

“Using a natural experiment (Regulation SHO), we show that short selling pressure and consequent stock price behavior have a causal effect on managers’ voluntary disclosure choices,” write Arizona State University associate professor Yinghua Li and City University...