Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices

This paper analyzes how newly introduced transparency requirements for short positions affect investors' behavior and security prices. Employing a unique data set, which contains both public positions above and confidential positions below the regulatory disclosure threshold, we offer several novel insights. Positions accumulate just below the threshold, indicating that a sizable fraction of short sellers avoid disclosing their positions publicly. The decision to cross the disclosure threshold appears to be persistent, with investors sticking to their secretive behavior. Short positions held by these secretive investors are associated with stronger negative returns compared to their peers, suggesting that secretive investors possess superior information. Furthermore, we document that negative information is incorporated more slowly into stock prices when a secretive investor is just below the disclosure threshold. Overall, these findings suggest that short sellers' evasive behavior in response to the transparency regulation imposes a negative externality on stock market efficiency.