Governance and Short Sales

Abstract

This paper investigates the relationship between short sales and governance. We argue that short sales are reversely linked to the overall level of corporate governance of a firm and that sellers react contemporaneously to changes in such governance. Our results show that short traders may also be able to forecast or influence changes in corporate governance and adjust their portfolios accordingly prior to the said changes. This reaction is asymmetric, with a pronounced increase in short positions for actual and anticipated negative changes in governance and a more subdued repurchase of shorted stock for positive expectations. We provide empirical evidence consistent with the notion that short sellers are informed investors and can generate a profit from corporate events by using analytical prowess or manipulative practices such as the record-date capture technique.