Does the Public Availability of Market Participants' Trading Data Affect Firm Disclosure? Evidence from Short Sellers

Market transparency affects how much information investors can glean by observing market data, while firm transparency determines the extent to which outsiders can gain access to firms’ inside information. Each type of transparency has been independently studied in the prior literature. The relation between the two, however, is not well understood. By making use of a natural experiment in which the transparency of short selling in the market place improved exogenously, this paper provides initial evidence on the consequences of improving market transparency on a firm’s transparency, and empirically tests recently developed dynamic disclosure theory. Using a unique difference-in-differences design, I illustrate that making short-interest data publicly available increases firms’ voluntary disclosure. This outcome suggests that revealing sophisticated investors’ trading positions has a disciplining effect on firm disclosure. Additional tests reveal that this disciplining effect exists for disclosures both before and after the short-interest release. Finally, to further understand firms’ rationale to disclose more, in cross-sectional analyses I show that the positive effect of making short interest public on firm disclosure increases with short-interest level and litigation risk, but decreases with the real-option value of withholding news. This paper highlights the importance of market transparency in improving firms’ information environment.Ph.D