Insider Sales under the Threat of Short Sellers : New Hypothesis and New Tests

Massa et al. (2015) show that corporate insiders become more opportunistic by selling more and faster in competition with short sellers. By considering the possibility that short sellers may react to insider trading, we propose a new hypothesis that short sellers play a disciplinary role in reducing insiders' opportunistic selling. Using the US Regulation SHO program and the China deregulation pilot program as quasi-experiments, we document a negative effect of short-selling threats on opportunistic insider selling in both countries. This evidence is supported by insiders' concerns regarding three effects of short selling: litigation risk, reputational damage, and loss of incentive compensation