Short-selling pressure and year-over-year MD&A modifications

Using the SEC's Regulation SHO as a natural experiment, we examine the effect of an increase in short selling pressure on the year-over-year modification of management discussion and analysis (MD&A) section of firms' 10-K reports. We find that the elevated threat of short selling, resulting from the removal of short-sale constraint, causes the randomly selected pilot firms to modify the MD&A section less relative to the previous year than non-pilot firms during the Regulation SHO period (2005–2007). Moreover, cross-sectional analyses indicate that this effect is pronounced in firms with moderately good news; firms that increase investment or equity issuance; larger or overvalued firms; and firms with conservative managers, financial stability, and opaque information environments.