Does the Public Availability of Market Participants’ Trading Data Affect Firm Disclosure? Evidence from Short Sellers

• In Event: Determinants of disclosure

Abstract

Market transparency impacts how much information investors can glean by observing market data, while firm transparency impacts what percentage of firms’ inside information is seen by outsiders. Each type of transparency has been independently studied in the prior literature. The relation between the two, however, is not well understood. By making use of a natural experiment where the transparency of short-sale activities improves exogenously, this paper provides initial evidence on the economic consequences of improving market transparency on a firm’s transparency, and empirically tests recently developed dynamic disclosure theory. Using a difference-in-differences design, I illustrate that increasing disclosure of short-interest data increases a firm’s voluntary disclosure. This outcome suggests that revealing sophisticated investors’ trading behavior in the stock market has a disciplining effect on a firm’s disclosure strategy. Additional tests reveal that this disciplining effect exists for voluntary disclosures both before and after the short-interest data become public. Finally, cross-sectional analyses show that the positive effect of transparency improvement on firm disclosures increases with short-interest level and litigation risk but decreases with return volatility and thus real option value of withholding news. This paper highlights the importance of market transparency on improving firm transparency.

Author

• Danqi Hu, University of Toronto - Rotman School of Management