Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling?
Massimo Massa INSEAD – Finance
Wenlan Qian National University of Singapore – NUS Business School
Weibiao Xu National University of Singapore (NUS)
Hong Zhang PBC School of Finance; INSEAD – Finance
December 9, 2014
Journal of Financial Economics (JFE), Forthcoming
INSEAD Working Paper No. 2014/63/FIN
We study how the presence of short sellers affects the incentives of the insiders to trade on negative information. We show it induces insiders to sell more (shares from their existing stakes) and trade faster to preempt the potential competition from short sellers. An experiment and instrumental variable analysis confirm this causal relationship. The effects are stronger for “opportunistic” (i.e., more informed) insider trades and when short sellers’ attention is high. Return predictability of insider sales only occurs in stocks with high short-selling potential, suggesting that short sellers indirectly enhance the speed of information dissemination by accelerating trading by insiders.