Why Do Firms Disagree with Short Sellers? Managerial Self-Interest Versus Private Information

Abstract

Though short sellers are generally adept at identifying overvalued equity, firms are more likely to repurchase stock when short interest increases. We investigate the causes and consequences of firms disagreeing with short sellers by repurchasing company stock. On average, managers do not disagree to defend overvalued stock; instead, these repurchases appear motivated by private information that dominates the information of short sellers. Information channels include future earnings, changes in risk, and acquisition activity. We observe one exception: Managers are more likely to defend overvalued stock if an activist investor previously identified the management team as inefficient. Our results suggest that short sellers and other investors can glean information from publicly available repurchase disclosures: An implementable trading strategy based on our findings yields annual abnormal returns of approximately 7%.