Short selling and the rounding of analysts' forecasts

This paper examines the causal effect of short selling on analyst forecast precision by exploiting a regulatory change in short-sale constraints (Regulation SHO) as a natural experiment. I find that short selling increases analysts' rounding of forecasts, which indicates that analysts allocate less effort to gathering precise information on firms with downward price pressure. In the cross-section, the effect of short selling on analyst forecast precision is stronger for firms with more firm-specific information and firms with low levels of institutional holdings.