Short Selling Activity Research Articles

Agreeing to disagree: Informativeness of sentiments in internet message boards

We study the informativeness of the sentiment of posts on Australia's largest online stock message board, HotCopper. We explore whether disagreements among sentiment form a signal about the fundamental news of a company. We find that positive sentiment is associated with noise induced (uniformed) trading whereas negative sentiment contains value-relevant information about a firm's performance. Our empirical findings suggest that short selling activity reduces overreactions of abnormal returns in a noisy environment on the same day. Furthermore, we observe a sentiment convergence pattern around annual earnings announcements and low levels of sentiment homogeneity relate to significantly lower annual earnings surprise. This supports the view that disagreements among sentiments are a signal of bad news about firm fundamentals.

Who to Target: Financial Performance, ESG Disclosure, and Short-Selling Activities in S&P 1500 Firms

Who to Target: Financial Performance, ESG Disclosure, and Short-Selling Activities in S&P 1500 Firms

On the Capital Market Consequences of Big Data: Evidence from Outer Space

Abstract We use the introduction of satellite coverage of major retailers to study the capital market implications of unequal access to big data. Satellite data enabled sophisticated investors with access to such data to formulate profitable trading strategies, especially by targeting the upcoming reports of retailers with bad news for the quarter. The introduction of satellite data led to more informed short-selling activity, less informed individual buying activity, and lower stock liquidity around the reports of retailers with satellite coverage. We conclude that unequal access to big data can increase information asymmetry among market participants without immediately enhancing price discovery.

The effect of margin-trading and short-selling mechanism on left-tail risk: Evidence from a quasi-natural experiment in China

This research investigates the influence of a margin-trading and short-selling pilot program on the left-tail risk of equities, utilizing A-share stock data in China from January 2004 to July 2020 as a sample. By exploiting the staggered implementation of the pilot program within a difference-in-differences framework, we examine the impact of margin-trading and short-selling mechanism on left-tail risks of equities in China. Firstly, we present empirical evidence that the introduction of margin-trading and short-selling mechanism can significantly mitigate the left-tail risk for the designated stocks. In particular, the effect is mainly from short-selling activities. Secondly, the empirical evidence suggests that the presence of information asymmetry among investors plays a mediating role in the mitigating impact. Thirdly, the findings demonstrate that mitigating effect of the mechanism is particularly pronounced during periods characterized by high investor sentiment and high levels of economic policy uncertainty. Additionally, results are robust to DID models when shell value contamination is removed, an alternative time period and measure of left-tail risk are considered, and placebo tests are conducted.

Return predictability of short-selling and financial distress firms: Evidence from Korean stock market

This paper investigates the relationship between short-selling activity and one-month ahead stock returns, with a focus on the role of distressed firms in the Korean stock market. In contrast to the U.S. market, we find that short-selling activity is concentrated on firms in the investment-grade group. Consistent with prior research, we find predictability of short-selling trading in stock returns. Moreover, we find that short-selling activity has significant role in predicting stock returns for investment-grade but not for speculative-grade group in the Korean market.

Dynamic Equilibrium with Costly Short-Selling and Lending Market

Abstract We develop a dynamic model of costly stock short-selling and lending market and obtain implications that simultaneously support many empirical regularities related to short-selling. In our model, investors’ belief disagreement leads to shorting demand, whereby short-sellers pay shorting fees to borrow stocks from lenders. Our main novel results are as follows. Short interest is positively related to shorting fee and predicts stock returns negatively. Higher short-selling risk can be associated with lower stock returns and less short-selling activity. Stock volatility is increased under costly short-selling. An application to GameStop episode yields implications consistent with observed patterns.

Was short selling embraced by participants in an emerging market during the COVID-19 pandemic?

The COVID-19 pandemic has put the financial system under considerable strain and triggered an unprecedented reaction in the financial market. To promote financial stability and strengthen the Malaysian financial market, the authorities banned regulated short selling activities in March 2020 and subsequently lifted the ban in January 2021. This study objectively examines the stock price reactions toward regulated short selling activities announcements and documents the most recent empirical study which examines the short selling related announcements in the emerging market. There are differing opinions on stock price reactions regarding short selling announcements, so to examine the stock price reactions, the event study methodology was employed. The event window for this study is -15 days, 0 (announcement day), +15 days. Interestingly, the findings showed that the stock prices responded negatively to the ban of regulated short selling activities and responded positively to the removal of the ban. This study supports the downward biased hypothesis which implies that the Malaysian market participants welcome regulated short selling activities.

Short selling pressure and tone management: evidence from regulation SHO

We study the causal effect of short selling on managers’ tone during earnings conference calls. Utilising Regulation SHO, a pilot scheme governing short-selling activity, we find that pilot firms with relaxed short-selling constraints use more negative tone. This effect is more pronounced for firms that are easier to short sell, those where managers have an incentive to manipulate tone, and those that engage in less earnings management. Moreover, the negative relationship between tone and future earnings no longer holds for the pilot firms after Reg SHO, suggesting that the tone of conference calls by pilot firms better reflects their future earnings after the regulation. Overall, our findings suggest that short sellers play a corporate governance role in tone management.

Investor Sentiment, Cross-sectional Stock Returns, and Short-Sales: Evidence From Korea

Purpose: This study investigates the return co-movements associated with investor sentiment shifts in the cross-sections under a setting where market-wide sentiment interacts with short-sale impediments.
 Design/methodology/approach: This study estimates the return sensitivity to market sentiment changes (sentiment beta) for each characteristic's portfolio by regressing the return of each quintile portfolio and various high-minus-low portfolios on the sentiment changes index. It examines whether these cross-sectionally different return co-movement patterns is more prevalent during good- than bad-sentiment periods by performing the same regression separately for the good- and bad-sentiment periods.
 Findings: The result shows that the returns of speculative stocks tend to co-move more strongly with sentiment changes than those of stable stocks, in the sense that speculative stocks have higher sentiment betas than stable stocks. The cross-sectional pattern in return co-movements becomes more pronounced during the good-sentiment period but disappears during the bad-sentiment periods.
 Research limitations/implications: This study elucidates the return co-movement behavior associated with investor sentiment changes under a setting where market-wide sentiment interacts with short-sale impediments. However, analyzing the relationship between the investment sentiment index and the short-selling activities is reserved for future research.
 Originality/value: The results provide important implications for investment strategies using investor sentiment in practice, and several suggestions for establishing investor protection policies in the highly individual-crowded market. This study will contribute to enhancing the stock market efficiency and price discovery.

Surprise in short interest

We extract the news component of short-selling activity by accounting for important cross-sectional, distributional differences in short interest data. The resulting measure of surprise in short interest negatively predicts the cross section of both U.S. and international equity returns. Our results also indicate that this predictability originates from short sellers’ informed trading on mispricing and investors’ underreaction due to their anchoring on past short interest. Finally, consistent with the notion of costly arbitrage, the return predictability is stronger among illiquid, volatile stocks and stocks with high information uncertainty, but importantly, unrelated to short-selling frictions.

Shareholder litigation and short selling ahead of private equity placements

AbstractWe examine the impact of shareholder litigation on short selling ahead of private investments in public equity (PIPEs). We find that PIPE issuers that incurred securities class action lawsuits prior to the PIPE are shorted more heavily ahead of the PIPE issue. The case status at the PIPE date, the severity of the lawsuit, and the timing of the private placement after the litigation event also affect the extent of short selling activity ahead of PIPEs. Consistent with hedging incentives, the effects of prior shareholder litigation on short selling are more pronounced in PIPEs where lead investors are hedge funds and in traditional PIPEs.

Short-selling activities in the time of COVID-19

This study examines the daily short-selling activities in the U.S. market during the early 2020 outbreak of the COVID-19 global pandemic. Our findings indicate firms that are more sensitive to the shock (i.e., with high foreign exposure, low financial or operating flexibility, or high supply-chain exposure) were shorted more heavily. Moreover, short-selling activities during the COVID-19 pandemic, blamed for triggering stock market crashes, were primarily concentrated around overpriced stocks. This finding supports the argument that short selling plays a prominent role in improving price discoveries. Our research provides timely empirical evidence supporting the U.S. Securities and Exchange Commission's (SEC) non-intervention approach in banning short selling in the U.S. market.

The Influence of Short Selling on Negative Press Coverage of Firms

We hypothesize that after a relaxation of short selling constraints, an escalation in short selling activity will heighten incentives for short sellers to accelerate price discovery by revealing their negative information. Consistent with this conjecture, we find that the overall sentiment of media coverage tilts significantly more negative for pilot relative to control firms following exogenous relief of short sale constraints. We find a more pronounced effect for media-initiated articles relative to firm-initiated press releases. Further, following abnormal increases in short interest, there is a significantly greater increase in negative news flow for pilot relative to nonpilot firms. Finally, we find that stock returns of firms with lower short selling constraints become significantly more sensitive to negative news reports. This paper was accepted by Suraj Srinivasan, accounting. Funding: The authors acknowledge the financial support of the Kenan-Flagler Business School and the Naveen Jindal School of Management. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4783 .

Short-selling and corporate default risk: Evidence from China

We examine the deregulation of short-selling in the Chinese stock market, and find that short-selling activities can reduce the default risk of the underlying companies. Such an effect is more pronounced when the information disclosure is worse and the corporate governance is weaker for the shortable companies, and also when the short-selling on the companies' stocks is more active. These results support the notion that short-selling can improve a company's financial management by contributing to its information transparency and corporate governance. Moreover, we find that it takes a longer time (over two years) for the short-selling activities to finally entice the improvements and reduce the risk. In addition to the reduced default risk, shortable companies also have better access to credit and debt capital. Our results stay robust after propensity score matching is applied and the effect of margin-trading is controlled.

Elucidating Directed Statistical Dependencies: Investigating Global Financial Market Indices' Influence on Korean Short Selling Activities

In previous studies, the short-selling market was a factor analyzed in a minor subject and mainly analyzed through macroeconomic factors or correlations. In this study, we tried to analyze the causal relationship with the short-selling volume of the Korean stock market by using Granger causality and transfer entropy, which is a different perspective compared to previous studies. The causal relationship between major global financial market indices and the prices of major community futures such as Bitcoin, gold, and silver and the amount of short selling in the Korean market was analyzed in the 20-day, 60-day, 120-day, and 240-day window. As a result, it was confirmed that very close linear and nonlinear directed statistical dependencies steadily occurred throughout the experimental period at the daily level.In particular, in the case of Granger-causality, it was confirmed that the causal relationship occurred the most from the price of crude oil futures in both the short term and the long term. In addition, the most frequent disambiguation of information from Saudi Arabia's market index, Tadawul All Share, can be interpreted as a result of having directed statistical dependencies from these oil-related indices due to Korea's high resource dependence. These results are significant because they provide a new perspective on macroeconomic market factors that researchers should consider when analyzing short selling.

Daily short selling around reverse stock splits

We examine prices and daily short selling activity around reverse stock splits using a difference-in-difference identification strategy. The results show negative returns for treatment stocks, relative to control stocks, around reverse splits. Additionally, short selling increases for treatment stocks vis-à-vis control stocks in the days after the reverse split announcements, but not before. Moreover, short selling on reverse split announcement and effective dates does not appear to contain more information about future negative returns than usual. Together, the results indicate that reverse stock splits attract short sellers’ attention, but that they are no more informed around these events than normal.

Can Short Selling Improve the Quality of Information Disclosure in Clarification Announcements by Firms Faced with Market Rumors?

ABSTRACT Using a sample of clarification announcements by Chinese listed companies and a difference-in-differences approach, this paper discusses the impact of short selling on corporate clarifications. The results show that short selling pressure disciplines managers’ clarification behaviors. Pilot firms are more likely than non-pilot firms to release timely, detailed, and technical clarification announcements, indicating that the ex-ante pressure of short selling improves the quality of information disclosure in clarifications. The results are robust to the use of a propensity score matching sample, the exclusion of extraordinary sample periods, controlling for the category of rumors, and the adoption of the double selection approach. The disciplinary effect of short selling on the quality of information disclosure in clarifications is more significant for companies with higher CEO equity-based incentive ratios, higher stock liquidity, and higher media coverage than for other companies. More intensive short selling activities, implying an increased ex-post threat of short selling, also lead to improvement in the disclosure of clarifications. Additional research shows that the improved disclosure increases stock price informativeness, and short selling enhances this effect.

Short selling, divergence of opinion and volatility in the corporate bond market

We investigate the impact of short selling activity on price volatility in the corporate bond market. We find that bond short selling activity is positively related to volatility, trading activity, and the volume-volatility relation. During the Global Financial Crisis, when investors’ expectations tend to be more homogenous, the positive relation between short selling activity and price volatility breaks down. We further show that bond short selling is not a substitute for equity short selling and put option trading. Overall, our study highlights the importance of bond short selling as a platform to express investors’ differences of opinion.

The sickle and the garlic chives: Volatility in the Chinese stock market

AbstractThis essay explores the meaning that volatility assumes in the Chinese stock market context. Drawing on discussions from ‘mom and pop’ online forums, it argues investors operate in a relational position with the Chinese state regulators that both sustain and threaten their market activities. Chinese stock markets are known to be the most volatile in the world. To face the state's arbitrary intervention in the market, investors must constantly juggle the options of either leaning on and trusting the regulators’ capacity to protect and rescue their stocks or engaging in risky margin trading and short-selling activities. This contradictory behavior is reflected in the popular self-mocking meme that keeps circulating in investors online forums, the one of the jiucai (meaning ‘garlic chives’). The investors often use it with irony to describe their own tendency to throw cash into the markets again and again, hoping to regain the money they lost in previous investments, never learning a lesson. Linking the financial with the biopolitical dimension, the essay takes the jiucai meme to show the extent to which volatility points to the production of new subjects whose resilience involves the adoption of practices of speculation to conjure a future for themselves that is reborn multiple times.

On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic

Using the exogenous shock of the COVID-19 pandemic, we study how informed market participants incorporate fiscal space into their trading decisions. At the onset of the pandemic, short-selling activity shifted towards companies with low financial flexibility but only in countries with limited fiscal space. Among such companies, short sellers specifically targeted those that generate their revenues mainly in the domestic market. These short sellers entered their positions before the market crash, thereby generating significant abnormal returns. We find no evidence of either herding behavior prior to the market crash or a long-run performance reversal of short sellers. These findings support the notion that short sellers help to promote price efficiency in times of crisis, where governments with budgetary constraints are unable to provide sufficient stimuli to their economies.