Abnormal Short Selling Research Articles

Short Selling Around Restatement Announcements: When Do Bears Pounce?

This paper draws on two distinct literatures – one that investigates the impact of accounting restatements and another that investigates the trading behavior of short sellers – to further our understanding of how sophisticated investors process and respond to news about accounting corrections. We examine short-seller behavior in the days surrounding restatement announcements to determine when short sellers identify restatements and how they trade on restatement news. Our findings suggest that short sellers do not appear to anticipate restatement announcement dates, but we find that abnormal short selling is significantly higher than is typical when restatements are announced, especially for restatements announced transparently (i.e., in press releases or 8-Ks). Short sellers target small companies, whose information environments may be weaker, and companies making restatements that reduce previously reported income. In addition, we find that restating companies targeted most heavily by short sellers experience the most negative subsequent abnormal returns over horizons of up to 40 trading days following the restatement disclosure. Overall, our results suggest that short sellers respond to, but do not anticipate, restatement announcements and trade as if they understand the post-announcement stock price implications of restatement disclosures.

Short Selling Around Corporate Acquisitions

Using daily short sale transactions data for firms traded in the Taiwan Stock Exchange (TWSE) from January 1991 to January 2007, we examine the pattern of short selling trading prior to 338 acquisition announcements. Consistent with the view that short sellers act as informed traders, we find that they have the ability to predict and time their trades prior to significant negative acquisition announcements. Specifically, our evidence shows that abnormal short selling prior to acquisition announcements is significantly associated with negative (bad acquisition news) post-announcement abnormal returns. The empirical results also show that short sellers act as specialized monitors who generate and release value-relevant information to the stock market prior to actual bad acquisition events. In addition, we find that short selling is driven by speculative rather than hedging motives. Robustness checks and the undertaking of alternative tests show that daily changes in short sales transactions lead future stock prices, consistent with the notion that the information advantage of short sellers broadens the informational efficiency of stock prices.

Short Sales, Informed Trading, and Merger Announcements

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.

Short Selling around Dividend Announcements and Ex-Dividend Days

We examine short selling around dividend announcements and ex-dividend dates. Contrary to our initial expectation, we do not find abnormally low (high) short-selling activity prior to announced dividend increases (decreases), which runs counter to the argument that short sellers have the ability to acquire private information before its public dissemination. However, we find that short selling prior to unfavorable dividend announcements is less profitable than short selling during non-event times, suggesting that some dividend announcements are not informative (Gonedes, 1978, and Benartzi, Michaely, and Thaler, 1997). Around ex-dividend dates, we do find abnormal short selling, which may be explained by the return pattern around ex-dividend days documented by Lakonishok and Vermaelen (1986), who suggest that demand for a particular stock by dividend capture traders drives stock prices above their fundamental value thus providing a profitable trading opportunity for short sellers. Consistent with this conjecture, we find that short selling on and after the ex-dividend day is more profitable as the negative relation between short selling and future returns is stronger on and after the ex-dividend day than during other times.

Capitalizing on Catastrophe: Short Selling Insurance Stocks Around Hurricanes Katrina and Rita

AbstractWe develop several hypotheses regarding short‐selling activity around Hurricanes Katrina and Rita. We find that abnormal short selling does not increase until 2 trading days after the landfall of Katrina and that short‐selling activity is much more significant around Rita. We find a substantial increase in short‐selling activity in the trading days prior to the landfall of Rita and relatively less short‐selling activity in the trading days after landfall. There is little evidence that suggests that traders short insurance stocks with more potential exposure in the Gulf region than other insurance stocks in the days before landfall.

Informed Trading Before Analyst Downgrades: Evidence from Short Sellers

This paper studies short-selling prior to the release of analyst downgrades in a sample of 670 downgrades of NASDAQ stocks between 2000 and 2001. We document abnormal levels of short-selling in the three days before downgrades are publicly announced. Further, we show that this pre-announcement abnormal short-selling is significantly related to the subsequent share price reaction to the downgrade, and especially so for downgrades that prompt the most substantial price declines. Our findings are robust to various controls that might also affect short-selling such as pre-announcement momentum, three-day pre-announcement returns, and the announcement-day share price. In addition, the results are independent of scheduled earnings announcements, analyst herding, and non-routine events near downgrades. Further evidence suggests that tipping is more consistent with the data than the prediction explanation which posits that short sellers successfully predict downgrades on the basis of public information about firms’ financial health. Finally, we present evidence that downgraded stocks with high abnormal short-selling perform poorly over the subsequent six months by comparison with those with low abnormal short-selling. Overall, our results support the hypothesis that short sellers are informed traders and exploit profitable opportunities provided by downgrade announcements.