Abstract
Using a dataset of insider trading and short selling from the Hong Kong Stock Exchange, we investigate the impact of large controlling shareholders on short sellers’ ability to predict insider trading. We document a significant increment in short selling volume before the information of insider sales is released to the public. Compared to widely held companies, insider trading in firms with large controlling owners triggers stronger short sales. Further, the abnormal short sales are more concentrated in family-controlled firms rather than state-controlled firms. The evidence of a concave relationship between the intensity of short selling and controlling power in family firms contributes to the ongoing debate on whether and when the entrenchment effect of large shareholders dominates the alignment effect. Within family-controlled firms, trading by non-family owners attracts more attention of short sellers. Overall, our analysis provides new evidence about the information interaction between short sellers and insiders and also the effect of the presence of large controlling shareholders on the information flows from insiders to outsiders.
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