UC Berkeley

Requiring short sellers to disclose their positions may discourage them from participating in the market, thus harming price efficiency (“constraint effect”). However, it may also provide a new source of value-relevant information to the market, thus improving price efficiency (“information effect”). The two effects counteract each other, rendering it difficult to empirically capture each effect distinctly. While prior literature has provided evidence of the constraint effect, it has left the information effect relatively unexplored. I identify a setting during which the information effect dominates, namely the earnings announcement setting, and document the implications of the information effect: information asymmetry and uncertainty decline around the announcement, pre-announcement information acquisition is greater, and earnings news is impounded more efficiently following its release. I study EU regulatory changes in a staggered difference-in-differences design. The empirical findings in this paper provide additional insights for the ongoing debate on short disclosure regulation in the US, providing credence to the argument of its advocates that mandatory short disclosures would provide valuable information.