Short‐selling pressure and year‐over‐year MD&A modifications

Abstract

AbstractUsing the SEC's Regulation SHO as a natural experiment, we examine the effect of an increase in short selling pressure on the year‐over‐year modification of management discussion and analysis (MD&A) section of firms' 10‐K reports. We find that the elevated threat of short selling, resulting from the removal of short‐sale constraint, causes the randomly selected pilot firms to modify the MD&A section less relative to the previous year than non‐pilot firms during the Regulation SHO period (2005–2007). Moreover, cross‐sectional analyses indicate that this effect is pronounced in firms with moderately good news; firms that increase investment or equity issuance; larger or overvalued firms; and firms with conservative managers, financial stability, and opaque information environments.