Short selling constraints and politically motivated negative information suppression

This study examines the effect of short selling constraints on politically motivated suppression of negative information. We use a unique setting in China, in which there are multiple exogenous changes in short selling constraints and firms have strong incentives to suppress negative information during politically sensitive periods. Results from Difference-in-Differences analyses and a regression discontinuity design show that removing short selling constraints can reduce politically motivated bad news suppression. Short selling can reduce negative information suppression through the channel of improved financial reporting quality, more management’s voluntary disclosure, and media’s more timely release of information. In addition, the effect of short selling on reducing bad news hoarding is more pronounced for more politically sensitive meetings and for state-owned firms located in regions with weaker market and institutional development.