Paper: Does Mandatory Short Selling Disclosure Lead to Investor Herding Behavior?

John C. Heater
Duke University – Fuqua School of Business

Ye Liu
Fudan University

Qin Tan
City University of Hong Kong (CityU)

Frank Zhang
Yale School of Management

We investigate two competing hypotheses for why clustering of trades occurs around short sale disclosure in the UK: herding- and information-based trading. Using a matched sample of firms with similar short interest, we find that firm-level short interest exhibits a much smaller reversal for disclosure stocks than for matched non-disclosure stocks. Second, we find that short sale disclosure occurs with similar frequency across the pre-earnings announcement, post-earnings announcement, and no-information windows, suggesting that information shocks do not drive disclosure clustering. Overall, the evidence is most consistent with investor herding behavior for the clustering of short sale disclosure.

Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3923046

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