Can Short Selling Improve the Quality of Information Disclosure in Clarification Announcements by Firms Faced with Market Rumors?

ABSTRACT

Using a sample of clarification announcements by Chinese listed companies and a difference-in-differences approach, this paper discusses the impact of short selling on corporate clarifications. The results show that short selling pressure disciplines managers’ clarification behaviors. Pilot firms are more likely than non-pilot firms to release timely, detailed, and technical clarification announcements, indicating that the ex-ante pressure of short selling improves the quality of information disclosure in clarifications. The results are robust to the use of a propensity score matching sample, the exclusion of extraordinary sample periods, controlling for the category of rumors, and the adoption of the double selection approach. The disciplinary effect of short selling on the quality of information disclosure in clarifications is more significant for companies with higher CEO equity-based incentive ratios, higher stock liquidity, and higher media coverage than for other companies. More intensive short selling activities, implying an increased ex-post threat of short selling, also lead to improvement in the disclosure of clarifications. Additional research shows that the improved disclosure increases stock price informativeness, and short selling enhances this effect.

KEYWORDS:

• Short selling
• corporate clarification strategies
• quality of information disclosure
• stock price informativeness

JEL:

• G34
• M41
• M42

Disclosure Statement

No potential conflict of interest was reported by the author.

Additional information

Funding

This work is supported by the Humanities and Social Sciences Youth Foundation, Ministry of Education of the People's Republic of China [No.22YJC630221] and the Colleges Innovation Project of Guangdong [No.2022WTSCX179]