Disclosure Tone and Short-Selling Pressure: Evidence from Regulation-SHO

Abstract

Managers use disclosure tone as a strategic tool to manage investors’ expectations and demand for information. I provide evidence that investors’ actions can, in turn, exercise a disciplining effect on tone management. Using exogenous relaxation in the short-selling constraints from Regulation-SHO and employing the difference-in-differences design on a propensity-score matched sample, I find that short-selling pressure reduces tone management. Greater short- selling pressure results in less optimism in tone unrelated to fundamentals, and in disclosures about the future rather than the past. Moreover, this reduction in tone management is stronger for firms with higher short-selling constraints pre-Regulation-SHO and for those with overoptimistic and overconfident managers.