Difference in Abnormal Short Selling Activity Following Events of Large Positive Stock Price Changes

Abstract

Based on the theoretical, methodological, and empirical foundations set in the previous chapters, in this chapter, I begin with the first part of the empirical investigation. As the chapter’s title suggests, methodologically it measures abnormal short selling activity following events of large positive stock price changes, which is investigated for significant differences between firms with and without convertible bonds. With regard to content, this analysis is primarily intended to test all predictions linked to Proposition 1. The objective is therefore to examine whether arbitrage-based short selling activity, i.e. the aggregate short selling in firms with convertible bonds, shows a different reaction to large positive stock return events and thus a significantly different trading pattern as compared to valuation-based short selling activity, i.e. the aggregate short selling in firms without convertible bond. The event study of Section 5.1 provides evidence for this, whereas Section 5.2 supplements these results by investigating the absolute and relative magnitude of abnormal relative short sales within a cross-sectional framework of short selling determinants.