Do Short-Term Institutions and Short Sellers Exploit the Net Share Issuance Effect?

Abstract

Existing literature documents that net share issuance significantly predicts cross-sectional stock returns, and yet institutional investors in aggregate do not trade on the net share issuance effect. Motivated by the findings in the existing literature that short-term institutions and short sellers are better informed and more sophisticated, in this study we examine whether short-term institutions and short sellers exploit the net share issuance effect. We provide evidence that short-term institutional investors and short sellers indeed trade in the direction of the net share issuance effect. Our results from Granger-Causality tests show that short sellers exploit information contained in net share issuance and the trading of institutional investors. In particular, short sellers take advantage of the trade of long-term institutions on the short side of the net share issuance effect.