Do Short Sellers Front-Run Insider Sales?

Mozaffar Khan · Hai Lu

139 citations0/0 files storedThe Accounting Review

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Financial Markets and Investment Strategies Corporate Finance and Governance Auditing, Earnings Management, Governance

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

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References

1973Risk, Return, and Equilibrium: Empirical Tests 2012The Econometrics of Financial Markets 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1997The Econometrics of Financial Markets 1997Event Studies in Economics and Finance 1996Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?1997Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?1987Constraints on short-selling and asset price adjustment to private information

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