Do investors affect financial analysts' behavior? Evidence from short sellers

We examine how short sellers affect financial analysts' forecast behavior using a natural experiment that relaxes short-sale constraints. We find that increased ease of short selling improves analyst earnings forecast quality by reducing forecast bias and increasing forecast accuracy. The improvements can be explained by both the disciplining pressure from short sellers and increased price efficiency from incorporating information in a timely manner. Although it is well documented that financial analysts can affect investors, our paper provides novel evidence on how sophisticated investors, short sellers, can affect analysts. KEYWORDS analyst forecast, disciplining effect, short sellers
1 I INTRODUCTION Financial analysts play an important intermediary role in capital markets: their earnings forecasts influence investors' earnings expectation, investment decisions, as well as firms' stock prices. (1) Despite [...]