Short Selling and Firm Operating Performance

Abstract

While it is well known that short selling predicts future negative stock price performance, it has not been established whether short selling predicts future negative operating performance. We find that firms in the top decile of increases in short interest (an increase of about four percentage points) experience a 21% subsequent decline in operating performance relative to matched control firms. The greater the increase in short interest, the larger the decline in operating performance. The results are robust to alternative performance measures and to sample splits based on firm size. These results suggest that short interest may reflect private information about firm fundamentals rather than other factors that may drive stock price changes.