Abstract
We examine short selling activity in OTC stocks using short selling volume and short interest data for a period from 2009 to 2016. We find that on average short volume constitutes 48% of daily trading volume in OTC stocks. Similar to exchange traded stocks, a portfolio with short position in stocks with high short selling volume and long position in stocks with low short selling volume has significant positive returns. Surprisingly, this positive return reverses over a period of next 1-month, indicating manipulative short selling. OTC stocks have higher short selling after a period of positive returns and on days of positive returns. Unlike exchange-traded stocks, short interest does not have predictive power for future returns. Short interest increases when the return over the past 15 days is positive, but it is lower for stocks with positive return over the last 1 year.
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