The Influence of Short Selling on the Production and Market Consequences of Negative Press Coverage

Abstract

The production, dissemination and market consequences of firm-specific information are shaped by the incentives of market players operating within the constraints imposed by securities regulation. In this paper we focus on constraints to short selling activity and address two questions: Do short sale constraints influence (1) the extent to which the business press reports negative news stories?; and (2) the speed and intensity with which market participants respond to the publication of negative news reports? Following exogenous relief of short sale constraints, we find that treated firms’ press coverage tilts significantly more negative relative to untreated firms still facing higher constraints. This result is stronger for media-initiated articles than for firm-initiated press releases. With respect to market consequences we find that for treated firms, stock returns and open short interest become significantly more sensitive to negative news reports, and news sentiment-based trading strategies earn lower abnormal returns.