Does Short Selling Regulate Insider Trading?

Abstract

This study investigates the impact of short selling on the relationship between the insider net buying ratio and excess returns, as well as on insider selling volume. The research period is divided into three distinct phases: short selling allowed, short selling banned, and partial short selling. The two primary findings of the analysis are as follows. First, the profitability of insider trading, assessed through the relationship between the insider net buying ratio and excess returns, is impacted positively when short selling is banned and negatively when it is permitted. Second, the insider selling volume significantly increases following short selling bans and decreases when the same is allowed. These results suggest that short sellers function as a market discipline mechanism, regulating both the profitability and volume of insider trading. This indicates that short selling regulations wield a substantial influence on the behavior and profitability of insider trading.