Do Short-Sale Constraints Restrict Negative Information Revelation? The Role of Institutional Sales

The extant literature concludes that binding short-sale constraints restrict negative information revelation because short sellers cannot trade to the full extent to reveal their information. However, it largely ignores information conveyed by informative sales. In contrast, our model predicts that if the information in informative sales is taken into account, then short-sale constraints do not significantly restrict negative information revelation. This is because some informed investors have greater incentives or lower costs to acquire more precise information than short sellers, and their sales can reveal much more negative information than what short-sales can. Our empirical analysis on informed institutional sales and illegal insiders sales consistently supports this prediction. In addition, we find that informed institutional sales lead short-sales, short-sale constraint stringency, and sales by other less informed. Our results highlight the importance of sales rather than short-sales for understanding market inefficiency such as bubbles