The Good News in Short Interest
46 Pages Posted: 17 May 2009 Last revised: 17 Nov 2020
There are 2 versions of this paper
The Good News in Short Interest
The Good News in Short Interest
Date Written: May 15, 2009
Abstract
We study the information content in monthly short interest using NYSE-, AMEX-, and NASDAQ-listed stocks from 1988 to 2005. We show that stocks with relatively high short interest subsequently experience negative abnormal returns, but the effect can be transient and of debatable economic significance. In contrast, we find that relatively heavily traded stocks with low short interest experience both statistically and economically significant positive abnormal returns. These positive returns are often larger (in absolute value) than the negative returns observed for heavily shorted stocks. Because stocks with greater short interest are priced more accurately, our results suggest that short selling promotes market efficiency. However, we show that positive information associated with low short interest, which is publicly available, is only slowly incorporated into prices, which raises a broader market efficiency issue. Our results also cast doubt on existing theories of the impact of short sale constraints.
Keywords: short sales, short interest, short sale constraints, market efficiency
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
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