The Impact of Short-Selling Pressure on Corporate Employee Relations

Abstract We show that randomly-selected Regulation SHO pilot firms respond to an increased threat of short selling by significantly improving their employee relations. Pilot firms enhance employee security to reduce the likelihood of employee-related negative publicity. The reduction of workplace concerns is most evident among pilot firms with higher degree of earnings manipulation, short interest potential, likelihood of labor disputes and employee whistle-blowing. Pilot firms experience better stock performance during the post Reg-SHO period after easing workplace concerns. Overall, our study provides novel evidence that the removal of short-selling constraints has a real effect on labor relations.