Does mandatory short selling disclosure lead to investor herding behavior?

Abstract

In this paper, we test two competing hypotheses for the clustering of short sale disclosure in the UK: herding- and information-based trading. We find evidence mainly consistent with investor herding behavior rather than with independent information-based trading. Short sale disclosure occurs with similar frequency across the pre-earnings announcement, post-earnings announcement, and no-information windows, suggesting that information shocks related to firm fundamentals are not a major factor of short sale disclosure clustering. More importantly, the clustering of short sale disclosure does not vary significantly between good and bad earnings news. Finally, we find that firm-level short interest exhibits a much smaller reversal for disclosure stocks than for matched non-disclosure stocks with similar prevailing short interest, a result consistent with the idea that the disclosure of short positions induces investor herding behavior and therefore makes short interest more persistent.