Mandated Short Selling Transparency and its Impact : An empirical analysis on significant short selling disclosures and their impact on Swedish small cap securities between 2017 - 2022

Abstract: In this paper, the impact of significant short selling disclosures (> 0.5%) on returns and trading activity is studied. By investigating how Swedish small cap shares are impacted through an event study on the returns and analysing the change in daily volume and turnover, our study contributes with a Swedish perspective to the short selling literature. Short selling is widely debated, where some scholars argue that it improves market efficiency and price informativeness, while others argue that it is damaging for liquidity and leads to abnormally negative returns. Following the 2008 financial crisis, authorities around the world increased the regulation on short selling. Subsequently, in 2012 the European Securities and Markets Authority mandated a reporting threshold of 0.5% on net short positions on traded securities (ESMA, 2022). We find insignificant CARs after a disclosure, where the closest to significance is the (0,1) window with a CAR of 1.08%, contradicting previous research on short-term impact (Aitken et al.,1998) and how small cap firms are affected (Israel & Moskowitz, 2013; Asquith et al., 2005). We detect no significant change in trading activity in the five or ten trading days after a disclosure. Small cap is not deemed to be a significant factor in predicting the CAR, with the slope having a 7.98% p-value. Ultimately, mandated disclosures are concluded to not impact Swedish small cap securities, contradicting previous research that short selling has a greater impact on smaller firms. The conclusion drawn is that the news value is low, and therefore is not relevant enough to drive price change or trading activity.