Short Sales, Informed Trading, and Merger Announcements

Abstract

Research argues that short sellers are informed investors as current short selling relates inversely with future returns. However, empirical results have yet to determine whether short sellers trade on private information before, say, an upcoming negative new. This paper takes a step in this direction by examining both shorting activity and the information contained in shorting activity around merger announcements. Results in this study do not show evidence of abnormal short selling in acquiring firms’ stocks prior the announcement of mergers. While we show a surge in shorting activity after the announcement, we find that the common negative relation between current shorting activity and future returns is weaker than normal during the post-announcement period. Further, we do not find evidence that the reaction to the announcement by short sellers is driven by factors that drive the post-announcement underperformance in acquiring firms. We are left to conclude that short sellers are neither privately informed nor superior in their ability to process information around merger announcements.