Do Short Sellers Trade on Private Information or False Information?

Abstract

We investigate whether short sellers contribute towards informational efficiency of market prices by trading on their private information or destabilize market prices by trading on rumors and false information. We do so by projecting a firm's short-selling activities on contemporaneous trading activities of its insiders - our proxy for the potential availability of private information. We find that short-selling activities are considerably informative about future stock returns when there is a higher likelihood of private information in stocks. Short-sellers also bring considerable additional information to the market, especially for smaller stocks, that is not fully captured by contemporaneous insider trading. Overall, these results suggest that on average short sellers bring informational efficiency to the market rather than destabilize them.

Keywords: Short sell, insider trading

JEL Classification: G14