Investors’ Quantitative Disclosure: Target Prices by Short Sellers

Abstract:

Informed short sellers can publicly disclose their short theses to circumvent limits to arbitrage by convincing long investors to sell. We study a rising phenomenon whereby short sellers provide quantitative disclosure in the form of target prices and examine whether and how this disclosure strategy is effective. We first document that short sellers’ target prices are informative in predicting future returns in various windows. Then, we demonstrate that the strategy of disclosing target prices is associated with stronger immediate price declines and accelerated price discovery, indicating that this strategy facilitates short sellers’ success. Next, we examine three channels through which disclosing target prices help short sellers more effectively overcome limits to arbitrage. We argue and provide evidence that target price disclosure signals short sellers’ confidence in the quality of their private information, and the reputation and retaliation concerns could make such a signal more credible. In addition, disclosing target prices reduce investors’ processing costs (awareness and acquisition costs) of short theses. Overall, we conclude that providing target prices is an effective strategy for short sellers, contributing to its rising popularity.