Short sales, short risk, and return predictability in Asia-Pacific real estate markets

Abstract

This paper investigates the information content of short sales across Asia-Pacific real estate markets. While the transparent nature of securitized real estate markets within the United States may render short selling activities relatively uninformative with respect to future firm values, such relations have not been broadly explored with respect to the rapidly developing Asia-Pacific region. Within this more informationally opaque market setting, we find evidence that short selling is significantly riskier than shorting in the U.S. Moreover, such risks may well influence investor behavior, as lower levels of shorting are observed across listed Asia-Pacific real estate firms than their U.S. based counterparts. Finally, we also document short sale considerations within this market sector are more informative with respect to future return predictability than similar signals observed for U.S. listed real estate firms. Specifically, increased levels of short interest outstanding, as well as elevated levels of exposure to short sale risk, both exhibit significant (negative) predictive ability over future equity returns. As such, we conclude the relative opacity of international equity markets creates limits to arbitrage, and thereby hinders the efficiency of the price discovery process for listed property companies across the Asia-Pacific region.