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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
May 5, 2023

The Influence of Short Selling on Negative Press Coverage of Firms


We hypothesize that after a relaxation of short selling constraints, an escalation in short selling activity will heighten incentives for short sellers to accelerate price discovery by revealing their negative information. Consistent with this conjecture, we find that the overall sentiment of media coverage tilts significantly more negative for pilot relative to control firms following exogenous relief of short sale constraints. We find a more pronounced effect for media-initiated articles relative to firm-initiated press releases. Further, following abnormal increases in short interest, there is a significantly greater increase in negative news flow for pilot relative to nonpilot firms. Finally, we find that stock returns of firms with lower short selling constraints become significantly more sensitive to negative news reports.

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