Family-Controlled Firms and Informed Trading: Evidence from Short Sales

Authors

  • RONALD C. ANDERSON,

  • DAVID M. REEB,

  • WANLI ZHAO

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    • Ronald C. Anderson is at the American University, David M. Reeb is at Temple University and the National University of Singapore, and Wanli Zhao is at Worcester Polytechnic Institute. We would like to thank Campbell Harvey (Editor), Lily Li, Yan Li, Robin Lumsdaine, Jerry Martin, Ram Mudambi, Lalitha Naveen, Michel Robe, Oleg Rytchkov, Yuzhao Zhang, the associate editor, and an anonymous reviewer for helpful comments and suggestions.


ABSTRACT

We investigate the relation between organization structure and the information content of short sales, focusing on founder- and heir-controlled firms. Our analysis indicates that family-controlled firms experience substantially higher abnormal short sales prior to negative earnings shocks than nonfamily firms. Supplementary testing indicates that family control characteristics intensify informed short selling. Further analysis suggests that daily short-sale interest in family firms contains useful information in forecasting stock returns; however, we find no discernable effect for nonfamily firms. This analysis provides compelling evidence that informed trading via short sales occurs more readily in family firms than in nonfamily firms.

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