Short selling threats and management disclosure behavior: Evidence from the effect of disclosure of short interest on peer firms’ management forecasts

Abstract

We examine the effect of mandatory short interest disclosure on the disclosure decisions of managers of peer firms of short selling target firms. We focus on the Japanese market, where the Financial Services Agency of the Japanese government introduced mandatory disclosure of short interest for all stocks listed on its exchange in 2008. We find that managers under the threat of short selling increase the frequency of their forecast revisions. The result suggests that managers attempt to mitigate information asymmetry to avoid short selling through improved disclosure. We also find that managers of overpriced firms increase the disclosure of bad news (downward forecast revisions). This suggests that managers are likely to increase the disclosure of bad news in order to correct overpricing and seek to avoid short selling. The results suggest that mandatory disclosure of short interest improves the information environment of peer firms, supporting the effectiveness of the short selling disclosure regulation.