Do Short Sellers Front-Run Insider Sales?

Author:

Khan Mozaffar1,Lu Hai2

Affiliation:

1. University of Minnesota

2. University of Toronto

Abstract

ABSTRACT: We study the behavior of short sellers as informed market participants and examine potential sources of their information. Using a newly available dataset with high-frequency short sales data, we find evidence of significant increases in short sales immediately prior to large insider sales, but not prior to small insider sales. We examine a number of explanations that the increase in short sales is driven by public information, either about the firm or about the impending insider sale. The evidence is inconsistent with these explanations, but is consistent with front-running facilitated by leaked information. The front-running appears to be concentrated in firms with poor accounting quality, suggesting that information about a large insider sale reinforces short sellers' adverse opinion about firm value when accounting quality is poor. JEL Classifications: G14, G18, G30, M41

Publisher

American Accounting Association

Subject

Economics and Econometrics,Finance,Accounting

Reference56 articles.

1. Information asymmetry, R&D and insider gains;Aboody;Journal of Finance,2000

2. Short sales are almost instantaneously bad news: Evidence from the Australian stock exchange;Aitken;Journal of Finance,1998

3. SEC is looking at stock trading;Anderson;The New York Times,2007

4. Short interest, institutional ownership and stock returns;Asquith;Journal of Financial Economics,2005

5. The relation among capital markets, financial disclosure, production efficiency, and insider trading;Baiman;Journal of Accounting Research,1996

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