Short Interests, Fundamental Analysis, and Stock Returns
35 Pages Posted: 24 Jul 1999
Date Written: May 1999
Abstract
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.
JEL Classification: G12, G14, M41
Suggested Citation: Suggested Citation
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