Short Interest Research Articles

Do Firms Redact Information from Material Contracts to Conceal Bad News?

ABSTRACT The Securities and Exchange Commission (SEC) allows firms to redact information from material contracts by submitting confidential treatment requests if redacted information is not material and would cause competitive harm upon public disclosure. This study examines whether managers use confidential treatment requests to conceal bad news. We show that confidential treatment requests are positively associated with residual short interest, a proxy for managers' private negative information. This positive association is more pronounced for firms with lower litigation risk, higher executive equity incentives, and lower external monitoring. Confidential treatment requests filed by firms with higher residual short interests are associated with higher stock price crash risk and poorer future performance. Collectively, our results suggest that managers redact information from material contracts to conceal bad news. Data Availability: Data used in this study are available from public sources identified in the study.

Media sentiment and short stocks performance during a systemic crisis

During crisis periods, investors often engage in short selling of stocks, in line with their pessimistic view of the present and future market performance as well as with the hope to repurchase the stocks back in the future at much lower prices. This attitude not only affects stock returns, but also may lead to significant risk transmission among assets. Addressing this concern, our study examines the returns and volatility connectedness between media coverage index (MCI) and high short interest stocks during the recent Covid-19 pandemic. We document MCI as a net transmitter for all returns series, whereas the results for volatility series exhibits binary behavior, acting as either a transmitter or recipient depending on the considered sector of economic activity. We highlight that the healthcare and energy sector stocks behave as net recipients of both, returns and volatility; hence, a certain caution is required while including them in investment portfolios. Finally, the causality test indicates that the MCI is more strongly connected with stock returns than with volatilities, thus signaling that media, may not only provoke a rise in stock volatility, but cause intense risk transmission especially during a systemic crisis similar to Covid-19.

Summaries of Papers in This Issue

Summaries of Papers in This Issue

Short selling efficiency

Short selling efficiency (SSE), measured each month by the slope coefficient of cross-sectionally regressing abnormal short interest on a mispricing score, significantly and negatively predicts stock market returns both in-sample and out-of-sample, suggesting that mispricing gets corrected after short sales are executed on the right stocks. We show conceptually and empirically that SSE has favorable predictive ability over aggregate short interest, as SSE reduces the effect of noises in short interest and better captures the amount of aggregate short selling capital devoted to overpricing. The predictive power is stronger during the periods of recession, high volatility, and low public information. In addition, low SSE precedes the months when the CAPM performs well and signals an efficient market. Overall, our evidence highlights the importance of the disposition of short sales in stock markets.

Do short sellers anticipate late filings?

Exploiting the setting of firms that are unable to disclose timely financial reports and thus must file with the U.S. Securities and Exchange Commission (SEC) the NT 10-K (Q) report, this study examines whether short sellers target firms with financial reporting weaknesses. We find that short interest increases in firms prior to the NT 10-K (Q) filing, suggesting that short sellers identify and target firms that cannot file their financial reports in a timely manner. Short selling is positively significantly related to subsequent late filing status, and is more pronounced in late filers with high newswire activity and with accelerated filing deadlines. Short selling of late filing firms is significantly negatively related to subsequent performance thereby suggesting that short sellers' trades pertinent to late filers are profitable. Overall, the results underscore a high information processing ability of short sellers in the setting of firms that exhibit financial reporting deficiencies.

Market Efficiency - A Structural Study

I use 8 different metrics as separate objective and systematic measures of the efficiency of the market for a stock. I develop a 7-equation (6- for non-Nasdaq stocks) structural model with market efficiency as a function of exogenous factors (transaction costs & constraints, short sales costs & constraints, and dispersion in investor valuations) and endogenous market activities (trading volume, short interest, number of analysts, institutional holdings, shares outstanding, and number of market makers (for Nasdaq stocks)), and each endogenous market activity as a function of the exogenous factors and all other endogenous market activities. I propose a theoretical model that shows that higher trading volume (or another similar market activity) is caused by lower transaction costs, lower short sales costs, and/or higher dispersion of investor valuations, and therefore, that the impact on market efficiency of transaction costs or short sales costs is an empirical question. I apply 3SLS and EiV to estimate the structural system and test the corresponding hypotheses, using panel-based instrumentation strategies for endogenous and inaccurately measured variables. Analyzing Nasdaq and non-Nasdaq stocks separately, I find that the impact on market efficiency is ranked as follows: transaction costs & constraints, short sales costs & constraints, and dispersion in investor valuations, that the Fama-French Factors are important in affecting these relationships, and that market efficiency is significantly but differently associated with endogenous market activities. Detailed Regression Results: https://drive.google.com/drive/folders/1VCydoyF9iHkj4UQo1TL36ZWR02DNFKwQ?usp=sharing

Investor Sentiment and Stock Price Crash Risk: Evidence from China

ABSTRACT We study the cross-sectional effects of investor sentiment on stock price crash risk from the perspective of investor behavioural biases. We develop a firm-specific investor sentiment measure, and find that stocks with stronger investor sentiment are more prone to a future price crash. The positive relation is more pronounced for stocks eligible for margin trading, as higher investor sentiment induces greater margin buy/cover by optimistic investors. Short interest moderates the impact of optimistic sentiment on crash risk. The positive relation is also particularly prominent for stocks with a more speculative appeal, especially for those with lower institutional ownership.

A note on GameStop, short squeezes, and autodidactic herding: An evolution in financial literacy?

This note explores a secondary effect of the GameStop short squeeze event and links the exalted focus of retail investors on meme stocks to financial literacy and autodidacticism. From an overview of stylized facts about the short squeeze of GameStop based on high frequency data, short interest, and key figures of related derivatives, it is shown that these financial concepts are reflected in keyword searches across multiple platforms. This self-education with regard to financial terms, keywords, and products and the understanding of basic market speculation mechanisms such as short sales plays a significant role for the influx of retail investors.

How do firms attract the attention of individual investors? Shareholder perks and financial visibility

Shareholder perks are packages of benefits offered to shareholders who own a threshold number of firm shares. We test and confirm the hypothesis that shareholder perks programs in Japan provide mechanisms to increase firm visibility for individual investors through stock-price run-ups and increased trading volume just before the ex-perks date. First, firms having perks programs experience a significant price run-up toward the ex-perks date. Second, the observed price run-ups are significantly higher for stocks having tighter short-selling restrictions. Third, trading volumes and balances of short interests rise significantly just before the ex-perks date. The latter suggests active cross trades, wherein investors hedge price risk. Fourth, the results from the multivariate regression are also consistent with the hypothesis.

Comovements between heavily shorted stocks during a market squeeze: Lessons from the GameStop trading frenzy

We examine the comovements between stock prices of different heavily shorted companies during a short-squeeze incident. Using the recent GameStop trading frenzy as a case study, we employ wavelet coherence analyses to determine its link with other frequently shorted stocks. We demonstrate a robust positive association between GameStop prices and the performance of high short interest indices. The bubble behavior driven by retail investor herding transmits between different stocks, even from unrelated sectors. Consequently, a single short-squeeze incident may build up into a potentially broader systemic risk, casting doubt on market integrity and stability.

A Long and a Short Leg Make for a Wobbly Equilibrium

We provide evidence that the online discussion on the WSB subreddit had a substantial negative impact on the profitability of shorting strategies across a number of stocks — even those that were neither heavily discussed on the subreddit, nor experienced an unusual increase in retail buying volume. We provide a model to explain how fears among short sellers can become self-fulfilling. In the model, the market for shares and the lending market must clear jointly. Despite standard assumptions, the model features multiple equilibria and run-type'' behavior by shorting agents. More broadly, the model provides a tractable framework to interpret several empirical observations on the relation between short interest, lending fees, and expected returns. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Which buy-side institutions participate in public earnings conference calls? Implications for capital markets and sell-side coverage

We examine the participation of analysts from different buy-side institutions (hedge funds, mutual funds, and RIAs) in public earnings conference calls and the associated capital market implications. Using 81,652 conference call transcripts for 3346 companies from 2007 to 2016, we find that buy-side analysts ask questions on approximately 18% of calls. Relative to sell-side analysts, buy-side analysts' interactions with management are shorter, convey less favorable tone, and exhibit more uncertainty. Buy-side activity on earnings calls is also associated with subsequent reductions in sell-side coverage, and buy-side tone is associated with sell-side analysts' price target revisions after the call. Importantly, our findings suggest that buy-side analysts representing a hedge fund play an important and unique role on conference calls. Specifically, hedge fund analysts represent nearly half (47%) of all buy-side appearances. In addition, when short interest in the firm is high, analysts representing a hedge fund are less likely to be permitted to ask the first question on the call, to ask lengthy questions, or to ask additional follow-up questions. Relatedly, relative to other buy-side analysts, the information conveyed by hedge fund analysts during the call is more strongly associated with both stock returns and investor uncertainty following the call.

The big picture: The industry effect of short interest

We examine whether industry-level short interest predicts industry stock returns and find that the former is negatively associated with the latter. Furthermore, this predictive ability is more pronounced in industries with higher information asymmetry surrounding firms, suggesting that either short sellers' access to private information or their superior information processing skills are important. We also find that this predictive ability is stronger when the short-sale constraint is more binding and when the economic condition is challenging. Overall, our results imply that short sellers' collective activities convey important industry information, leading to predictable and profitable industry portfolios.

Revisiting the role of fiscal policy in determining interest rate in India

The issue of fiscal policy affecting interest rates is ever-evolving that depends on the structure of the economy and the strength of the financial markets. Hence, it is necessary to continuously validate this relationship between fiscal policy and interest rates. Towards this, the present paper tries to empirically examine and understand the transmission channels through which fiscal policy could affect short, medium, and long-term interest rates in India using Structural Vector Autoregression (SVAR) and Toda-Yamamoto causality approaches. Our results suggest that fiscal policy has a marginal impact on interest rates in the short run, while it has a larger positive impact on interest rates in the long run through the inflation route. In terms of the policy, in the long run, there is a need for containing the structural part of the fiscal deficit within the fiscal consolidation (Fiscal Responsibility and Budget Management Act) framework in India.

Closing the deal: Managerial response to short sellers following M&A announcement

When firms announce a merger or acquisition, shareholders, analysts, and the media respond. Firms are less likely to complete a deal when those reactions are negative. We, however, uncover a scenario where the opposite occurs. When short interest (i.e., the percentage of shares shorted) increases following announcement of a deal, managers at firms become more likely to complete the deal. We theorize that short selling after deal announcement constitutes an ego threat to managers that induces escalation of commitment. This is because short sellers are adversarial, or they win when stock prices fall. Moreover, we argue that this managerial response is heightened in situations where managers are more likely to be defensive about their decisions, such as when the deal is large or the target firm is publicly-traded. Our empirical findings lend support to the arguments.

IMPACT OF MONETARY POLICY TARGETS ON CAPITAL MARKET DEVELOPMENT IN NIGERIA

This study empirically examines the impact of monetary policy targetson capital market development in Nigeria from 1986-2018. Time series data and econometric tools were used to test for the stationarity and causality effect. The Auto-Regressive Distributed Lag Model (ARDL) and Error Correction Model (ECM) techniques were used to examine the short-run and long-run impact and relationship between Monetary Policy and Capital Market Development in Nigeria. The study revealed that both in the long run and short run Exchange Rate (EXCHR), Inflation Rate (INFR), and Interest Rate in Nigeria (INTR)were negatively related to Capital Market Development (CAMKTD) in Nigeria and they were statistically insignificant in explaining changes in Capital Market Development (CAMKTD) in Nigeria. On the other hand, inthe long run, Money Supply was positively related to Capital Market Development (CAMKTD) in Nigeria and was statistically significant at a 5% level significant while Money Supply (M2) was positively related to Capital Market Development (CAMKTD) in Nigeria both in the long run and short-run and was statistically significant at 5% level of significance. Therefore, the study recommends that government should improve the efficiency and effectiveness of the money supply in Nigeria since it was statistically significant in determining the improvement of Capital Market Development (CAMKTD) in Nigeria.

Short Selling Activity and Future Returns: Evidence from FinTech Data

We use a novel dataset from a leading FinTech company (S3 Partners) to study the ability of short interest to predict the cross-section of U.S. stock returns. We find that short interest (i.e. the quantity of shares shorted expressed as the fraction of shares outstanding) is a bearish indicator, consistent with theoretical predictions and with the intuition that short sellers are informed traders. The hedged portfolio long (short) in the top (bottom) short-interest decile generates an annual 4-Factor Fama-French alfa of -7.6% when weighting stocks equally and of -6.24% when weighting stocks based on market capitalization. Conditioning on past returns improves the predictive accuracy of short interest: the hedged short-interest portfolio that only uses stocks that appreciated the most in the past six months generates an alfa of -17.88%. Multivariate regressions that control for other known drivers of stock returns (e.g. size, value and liquidity) confirm the validity of these findings. In both Fama-MacBeth and Panel regressions we find that a one standard deviation increase in short interest predicts a drop in future adjusted returns of between 4.3% and 9.3%.

Implications of Short Selling for Corporate Finance

Corporate managers often view short sellers as market manipulators whose actions drive their company's stock price below intrinsic value. But recent academic research suggests that some short sellers are effective in processing publicly available information and that their short selling may provide useful information to market participants. This article summarizes the authors’ own published research, which provides evidence of informed short selling by linking it to changes in corporate fundamentals.More specifically, the authors’ findings indicate that increases in short interest are reliable indicators of an economically (as well as statistically) significant decline in a company's operating performance over the following three years. And when examining changes in short interest around announcements of seasoned equity offerings, the authors also find a negative relation between an increase in short interest and future operating performance. In addition, they find that the greater the increase in short interest in the period leading up to the SEO announcement, the more negative is the stock‐price response to the announcement itself.The authors’ findings suggest that corporate managers can benefit from monitoring the short‐selling activity in their company's stock. Short‐selling data can be used to reassess corporate strategy or rethink major corporate decisions that have been announced but not carried out, and take preemptive actions to forestall impending future declines in performance and so preserve value.

Short selling, agency, and corporate investment

AbstractIn this article, we examine corporate investment decisions in a model with short selling. We show that high short‐selling activities can cause firms to overinvest and that the agency problems between managers and shareholders drive this overinvestment. Empirically, we find that short interest is positively associated with subsequent corporate investment and that the effect of short‐selling activities on investment is stronger when the sensitivity of chief executive officer compensation to stock price performance is greater. The results are not explained by short‐sale constraints or firm overvaluation. Additionally, short‐selling‐induced corporate investments can partly explain the negative relation between both short interest and corporate investment with subsequent stock returns.

The asymmetric online talk effect

PurposeThe authors investigate the extent to which online talk can influence contemporaneous and future stock trading, especially when market news is unpresented.Design/methodology/approachThe authors propose an improved sentiment formula incorporating online hype, neutral sentiment and poster reputation. In addition, they conduct event study, OLS regression analyses and probit models.FindingsFirst, investors tend to be more talkative in relation to firms that are (1) smaller size, (2) more growth-like, (3) with lower prices and higher short interests and (4) of higher beta. Second, the bullish tone of investors positively affects the abnormal returns of small-capitalization stocks. However, online talk has little impact on large-capitalization stocks, except that more postings boost trading liquidity. Third, online talk predicts the presence of future news regardless of firm size, with stronger predictive power found for small-capitalization stocks.Practical implicationsIt is of interest to practitioners and researchers to study online talk so as to better understand the trading psychology of retail investors and the effects on the stock market. Furthermore, policymakers are interested in tracking activities on stock message boards in order to prevent security fraud and protect investors' interests.Originality/valueThe results are robust and suggest that online talk has significant impacts on stock trading exploiting an information asymmetry. This study of stock message board posting activities helps researchers to understand whether message contents contain valuable and unique content compared with information available via more traditional media channels.