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Short selling and readability in financial disclosures: A controlled experiment

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  • Minxing Sun
  • Weike Xu

Abstract

We examine the causal effect of short‐selling on a firm's annual report readability using regulation SHO, which relaxes short‐sale constraints for a random sample of pilot stocks. Pilot firms produce significantly less readable annual reports than nonpilot firms during the experiment period. Our results are more pronounced for firms that receive less investor attention and those with poorer growth prospects. Furthermore, pilot firms increase the use of uncertainty words in annual reports during the experiment period. Our results suggest that firms produce less transparent financial disclosures that are more costly for investors to comprehend when short‐sale constraints are less rigorous.

Suggested Citation

  • Minxing Sun & Weike Xu, 2024. "Short selling and readability in financial disclosures: A controlled experiment," The Financial Review, Eastern Finance Association, vol. 59(2), pages 265-292, May.
    • Handle: RePEc:bla:finrev:v:59:y:2024:i:2:p:265-292
    DOI: 10.1111/fire.12379
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