Short-sightedness, Short-sale Constraints and the Dissemination of Private Information

We develop a model of private information dissemination by a short-sighted raider within a market for a risky asset. Because the raider is risk-averse and atomistic, her trades do not directly affect prices. In addition, because she is short-sighted, she needs to liquidate her position before the asset price fully reflects her private information. We establish that under these conditions she finds it optimal to publicize her signal in order to move the asset price in the desired direction when her information is either very bad or very good. We prove that short-sale constraints affect the raider’s dissemination policy, in that when they are tight she is less likely to disclose her signal when this is negative and when she does so it is because her information is extremely bad. We establish a number of empirical implications of the raider’s dissemination policy which are coherent with the analysis of 265 damning reports published between 2010 and 2021 by a group of 12 dedicated short-bias funds.