Reputation and recency: How do aggressive short sellers assess ESG-Related Information?

Abstract

We examine the effects of short- and long-term as well as positive and negative ESG reputation of companies on aggressive short selling. Our results suggest that aggressive short selling is most associated with recent and negative ESG-related news. These findings are consistent with the recency and negativity biases of reputation literature. When we separate the companies into positive and negative long-term ESG reputation, we find that aggressive short selling occurs most frequently in the subgroup of companies that possess a long-term, negative ESG reputation jointly with recent, negative ESG-related information. Interestingly, however, we do not find that the aggressive short selling of this subgroup is followed by significantly negative abnormal returns. Instead, we find significant negative abnormal returns following aggressive shorting of the subgroup with a long-term, positive ESG reputation coupled with recent, negative ESG-related information, which is consistent with the expectancy violation theory of reputation literature.