Short selling pressure and tone management: evidence from regulation SHO

We study the causal effect of short selling on managers’ tone during earnings conference calls. Utilising Regulation SHO, a pilot scheme governing short-selling activity, we find that pilot firms with relaxed short-selling constraints use more negative tone. This effect is more pronounced for firms that are easier to short sell, those where managers have an incentive to manipulate tone, and those that engage in less earnings management. Moreover, the negative relationship between tone and future earnings no longer holds for the pilot firms after Reg SHO, suggesting that the tone of conference calls by pilot firms better reflects their future earnings after the regulation. Overall, our findings suggest that short sellers play a corporate governance role in tone management.