Do Managers Learn from Short Sellers?

Abstract

This paper investigates whether short selling activities affect corporate decisions through an information channel. By exploiting a unique institutional feature in Hong Kong market that only stocks included in an official list are eligible for short sales, I show that non-shortable firms' investment is positively and significantly related to their shortable peers' stock prices: a one standard deviation decrease in shortable peers' stock prices is associated with a decrease in nonshortable firms' investment by around 10%. I verify that this relationship is not driven by shortable peers' firm characteristics other than short-sale eligibility. Moreover, this relationship becomes stronger in situations where non-shortable firms' managers are more likely to learn negative information from shortable peers' stock prices. These findings are consistent with my hypothesis that non-shortable firms' managers seek to learn short sellers' information on external conditions from shortable peers' stock prices and use this information in their corporate investment decisions.