https://www.nber.org/system/files/working_papers/w8151/w8151.pdf

Breadth of ownership and stock returns

We examine short selling in US stocks based on new SEC-mandated data for 2005. There is atremendousamountofshortsellinginoursample: shortsales represent24%ofNYSE and 31% of Nasdaq share volume. Short sellers increase their trading following positive returns and they correctly predict future negative abnormal returns. These patterns are robust to controlling for voluntary liquidity provision and for opportunistic risk-bearing by short sellers. The results are consistent with short sellers trading on short-term overreaction of stock prices. A trading strategy based on daily short-selling activity generates significant positive returns during the sample period. (JEL G12, G14)

/pdf/short-sale-strategies-and-return-predictability-2esdbz4rk4.pdf

Short-Sale Strategies and Return Predictability

We construct a long daily panel of short sales using proprietary NYSE order data. During 2000-2004, shorting accounts for more than 12.9% of NYSE volume, suggesting that short-sale constraints are not widespread. As a group, these short sellers are quite well-informed. Heavily shorted stocks underperform lightly shorted stocks by a risk-adjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional non-program short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The results indicate that, on average, short sellers are important contributors to efficient stock prices.

/pdf/which-shorts-are-informed-4al9349peq.pdf

Which Shorts are Informed

https://jurnalilmiahmanajemen.files.wordpress.com/2011/03/short-sellers-fundamental-analysis-and-stock-returns.pdf

Short-sellers, fundamental analysis and stock returns *

Firms with low ratios of fundamentals (such as earnings and book values) to market values are known to have systematically lower future stock returns. We document that short-sellers position themselves in the stock of such firms, and then cover their positions as the ratios revert to normal levels. We also show that short-sellers avoid firms where the transaction costs of short-selling are high and where the low ratios are due to temporarily low fundamentals, rather than temporarily high prices. Our evidence suggest that short-sellers use information in these ratios about either (i) temporary mispricing, or (ii) unknown risk factors, to boost their investment returns.

Cross-sectional and time series tests are performed to explain levels and changes in short interest. Explanatory variables and tests are chosen based on tax, arbitrage, and speculative reasons for going short. Short interest is found to follow a seasonal pattern that is weakly consistent with tax-based trading. Stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest, which is con? sistent with arbitrage efforts. For firms with traded options, there is a positive association between the month-to-month changes in option open interest and short interest. Prior months' returns and changes in short interest are positively related, but there is no rela? tionship between changes in short interest and returns in the subsequent month.

Averil Brent

Papers

Short Interest: Explanations and Tests