Short-sightedness, Short-sale Constraints and the Dissemination of Private Information

We develop a model of optimal dissemination of private information by a short- sighted raider within a market for a risky asset. Because the raider is risk-averse and atomistic, her trades cannot directly affect prices. In addition, because she is short- sighted she needs to liquidate her portfolio before the asset price fully reflects her private information. We establish that under these conditions she finds it optimal to reveal her private information on the risky asset in order to move the asset price in the desired direction when her private information is either very bad or very good. We prove that short-sale constraints affect the raider’s dissemination policy, in that when they are tight she is less likely to disclose her private signal. We establish a number of empirical implications of the raider’s dissemination policy which are coherent with empirical evidence on the limits to arbitrage and the activity of dedicated short-bias funds