Does Market Transparency Keep the Bear Asleep? Implications of Short Selling Disclosure on the Lending Market and Corporate Behaviors

We examine the impact of the short sell disclosure (SSD) regime on the stock lending market, corporate behaviors, and investor behaviors, employing a staggered difference-in- difference (DiD) methodology. Our research reveals that the introduction of the disclosure regime enhances market transparency, resulting in a diminished appeal of stock ownership in the lending market for active investors. This shift is accompanied by a reduction in in- formation leakage risks and longer loan durations. Furthermore, the cost associated with short-sell disclosure causes a decline in both lending supply and short demand. Notably, companies respond to increased transparency in short selling by repurchasing shares to mit- igate potential public shorting threats. In addition, firms exhibit a tendency to save more cash and issue more debt as a response to heightened transparency regarding short-selling activities. This effect is more pronounced for firms with stronger managerial incentives but less prominent for firms with limited financial flexibility.