Short Stock Research Articles

The Effect of Heating time on the Quality of Short Necked Clam Stock

The Effect of Heating time on the Quality of Short Necked Clam Stock

Using Social Responsibility Ratings to Outperform the Market: Evidence from Long-Only and Active-Extension Investment Strategies

In this article, the authors use KLD Research and Analytics (KLD) rankings from 1991 to 2009 to create three long-only portfolios: high-ranking “Top” stocks, “Shunned” stocks, and “Top and Shunned” stocks. They also construct three 130/30 active-extension portfolios, with 130% exposure in each of the three long-only portfolios and 30% exposure in a short portfolio of low-ranking “Bottom” stocks. The authors find positive, statistically significant abnormal returns for all six portfolios relative to their matched portfolios and the S&P 500. In addition, they find that the three 130/30 active-extension portfolios generally outperform the three long-only portfolios, including producing higher information ratios. As predicted, the highest-performing active-extension portfolio includes stocks for both Top companies and Shunned companies. Moreover, the performance for this 130/30 active-extension portfolio increased as the long and short positions were increased to 140/40 and 150/50. Thus, the results suggest that social responsibility ratings can be actively used to outperform the market. These findings further suggest that employing active-extension strategies that short stocks for companies with low social responsibility ratings may add additional abnormal returns.

TWO PROCESSES FOR TWO PRICES

Postulating additivity of bid and ask prices for claims comonotone with a long or short stock position, two pricing processes are identified from data on bid and ask prices for options. It is observed that there are two separate put call parity relations in place, with the ask price for call less bid prices for put delivering an ask price for the forward-stock. Likewise the ask for puts less the bid for calls identifies the bid for the forward-stock. Two processes are introduced to determine bid and ask prices for claims comonotone with a long or short position in the stock. For a claim comonotone with a long position one uses the so-called increasing process for the ask price and the so-called decreasing process for the bid price and vice versa for a claim comonotone with a short position. As candidates for the two processes one may employ any of the traditional one-dimensional Markov processes. We illustrate the theory by using a Sato process, a model known to produce a smile conforming fit over strike and maturity. The two processes are observed to have marginals related by first order stochastic dominance. The increasing process dominates the decreasing process in this sense. These two processes are also used to construct upper and lower bounds for bid and ask prices for claims not comonotone with a long or short stock position. The two processes and their properties are illustrated with data on bid and ask prices for options on the exchange traded fund, SPY, that is the Standard and Poors' Depository Receipt tracking the S&P 500 index.

Does Short Selling Erode Market Liquidity?

This study examines how stock market liquidity dynamically responds to the spike in short interest ratio and dissects the causal linkage between short interest ratio and stock market liquidity. Based on the analysis of monthly data from 1931M6 to 2013M7, the results show that the percentage change in the NYSE share volume turnover significantly drops structurally following the spike to the percentage change in the NYSE short-interest ratio. The Granger causality test also shows that there is a causal direction running from the percentage change in the NYSE short-interest ratio to the percentage change in the NYSE share volume turnover suggesting that short selling causes the erosion of stock market liquidity.

Short Sales Constraints and Price Adjustment to Earnings Announcements

This study looks at how short sales constraints affect the stock price adjustment to the release of public information in the Hong Kong Stock Exchange for a sample of 4,757 firm-event observations over the period 1994-2011. Using a unique feature of this market that allows us to directly investigate the impact of the imposition of short sales restriction, we find following results. First, nonshortable stocks react more strongly to negative information than shortable stocks. Second, nonshortable stocks are overpriced before the negative earnings announcement. Hence, part of the strong market reaction of nonshortable stocks on announcement day could be due to the correction of such overpricing. Third, prices of nonshortable stocks reverse following the announcement of negative information, suggesting that investors overreact to the negative information on the announcement day. Fourth, it takes longer time for the prices of nonshortable stocks to fully adjust to the negative earnings information. On the whole, our results are supportive of the stream of research that finds the imposition of short sales restrictions reduce the efficiency of stock markets.

Short Selling Restrictions, Transaction Costs, and Stock Returns

Short Selling Restrictions, Transaction Costs, and Stock Returns

Leveling the trading field

We examine the impact on stock prices of a major upgrade to the New York Stock Exchange's trading environment. The upgrade improved information dissemination on the trading floor and reduced the latency in reporting trades and quotes. The portion of the upgrade that reduced latency for electronic orders had significant impacts on liquidity, turnover, and returns. A portfolio that is long stocks undergoing the upgrade in the first 20 days of the upgrade and short stocks receiving the upgrade later has a return of roughly 3% over the period. The abnormal return was a priced effect of the improved liquidity produced by the upgrade.

Against the tide: the commencement of short selling and margin trading in mainland China

China's recent removal of short-selling and margin trading bans on selected stocks enables testing of the relative effect of margin trading and short selling. We find the prices of the shortable stocks decrease, on average, relative to peer A-shares and cross-listed H-shares, suggesting that short selling dominates margin trading effects. Contrary to the regulators' intention and recent developed market empirical evidence, liquidity declines and bid-ask spreads increase in these shortable stocks. Consistent with Ausubel (1990), these results imply that uninformed investors avoid the shortable stocks to reduce the risk of trading with informed investors.

Two Processes for Two Prices

Postulating additivity of bid and ask prices for claims comonotone with a long or short stock position, two pricing processes are identified from data on bid and ask prices for options. It is observed that there are two separate put call parity relations in place, with the ask price for call less bid prices for put delivering an ask price for the forward stock. Likewise, the ask for puts less the bid for calls identifies the bid for the forward stock. Two processes are introduced to determine bid and ask prices for claims comonotone with a long or short position in the stock. For a claim comonotone with a long position, one uses the so-called increasing process for the ask price and the so-called decreasing process for the bid price, and vice versa for a claim comonotone with a short position. As candidates for the two processes, one may employ any of the traditional one dimensional Markov processes. We illustrate the theory by using a Sato process, a model known to produce a smile conforming fit over strike and maturity. The two processes are observed to have marginals related by first order stochastic dominance. The increasing process dominates the decreasing process in this sense. These two processes are also used to construct upper and lower bounds for bid and ask prices for claims not comonotone with a long or short stock position. The two processes and their properties are illustrated with data on bid and ask prices for options on the exchange traded fund, SPY.

Developmental and genetic characterization of a short leaf mutant of sorghum (Sorghum bicolor L. (Moench.))

Changes in plant architecture, specifically conversion to compact canopy for cereal crops, have resulted in significant increases in grain yield for wheat (Triticum aestivum) and rice (Oryza sativa). For sorghum (Sorghum bicolor L. Moench.) a versatile crop with an open canopy, plant architecture is an important feature that merits strong consideration for modification. Here, we report the genetic, developmental, and physiological characterization of a sorghum genetic stock, KFS2061, a stable mutant (in the Western Black Hull Kafir background) which exhibit short and erect leaves resulting in compact plant architecture. Genetic study of an F2 population derived from the cross of KFS2061 to BTx623 showed that the short leaf is recessive and appeared to be controlled by a single gene. The expression of the short leaf trait commenced with the 3rd leaf and is propagated through the entire leaf hierarchy of the canopy. The short leaf mutant exhibited consistent steep leaf angle, 43° (with the main culm as reference), and greener leaves than wild type. Biochemical analyses indicated significantly higher chlorophyll and cellulose content per leaf area in the mutant than wild type. Histological studies revealed reduction in cell length along the longitudinal axis and enlargement of bulliform cells in the adaxial surface of the mutant leaf. Further evaluation of agronomic traits indicated that this mutation could increase harvest index. This study provides information on a short leaf genetic stock that could serve as a vital resource in understanding how to manipulate plant canopy architecture of sorghum.

Informed Short Sellers and Stock Price Reactions to Earnings Announcements: Evidence from China

Using the special event of short selling ban removal in the Chinese stock market in March 2010, I study the relationship between short selling activities and future stock returns and the effect of short sale constraints on stock price reactions to earnings announcements. I find strong evidence supporting the Diamond and Verrecchia (1987) hypothesis that an unexpected increase in short interest predicts negative future stock returns. The long-short portfolio that buys stocks with a decline or no change in short interest and shorts stocks with an increase in short interest is able to generate a significant positive return in the following week. The positive return is strongest during the first two days, is most significant in three industries: properties, conglomerates, and industrials, is highest for big firms, growth stocks, and stocks with high short interest. Moreover, I also confirm the Diamond and Verrecchia (1987) prediction that reducing short sale constraints leads to smaller price adjustments on the private information announcement day as the stock price reaction to earnings surprises on earnings announcement day is found to be 70% lower after the short sale ban is removed. However, I don’t find evidence supporting their prediction that the reduction in price reaction is larger when negative news is released due to data limitations.

Short Interest, Returns, and Fundamentals

We show that short interest predicts future bad news, negative earnings surprises, and downward revisions in analyst earnings forecasts. Moreover, short interest is a better predictor of changes in firm fundamentals for stocks that are harder to short and short sellers appear to have information about these events several months before they become public. Most importantly, the well-known cross-sectional relation between short interest and future stock returns vanishes after controlling for short sellers’ information about future fundamental news. Thus, short sellers contribute in a significant manner to price discovery about firm fundamentals.

Short Sales Constraints and Price Adjustment to Earnings Announcements

This study looks at how short sales constraints affect the stock price adjustment to the release of public information in the Hong Kong Stock Exchange for a sample of 4,757 firm-event observations over the period 1994-2011. Using a unique feature of this market that allows us to directly investigate the impact of the imposition of short sales restriction, we find following results. First, nonshortable stocks react more strongly to negative information than shortable stocks. Second, nonshortable stocks are overpriced before the negative earnings announcement. Hence, part of the strong market reaction of nonshortable stocks on announcement day could be due to the correction of such overpricing. Third, prices of nonshortable stocks reverse following the announcement of negative information, suggesting that investors overreact to the negative information on the announcement day. Fourth, it takes longer time for the prices of nonshortable stocks to fully adjust to the negative earnings information. On the whole, our results are supportive of the stream of research that finds the imposition of short sales restrictions reduce the efficiency of stock markets.

Impact of heterogeneous beliefs and short sale constraints on security issuance decisions

Extant literatures discuss a firm's security issuance implications of heterogeneous beliefs with explicit assumption that short selling is forbidden. However, it is widely accepted that short sale constraints exist when investors are unable to short stock to the extent they desire. This paper presents a model to analyze how heterogeneous beliefs and short sale constraint conditions jointly affect a firm's security issuance decision. The main findings are: i) An increase in heterogeneity in investors' beliefs results in an increased likelihood of equity issuance over debt when public signal is favorable, whereas it results in a reduced likelihood when public signal is modestly adverse. ii) The tightness of short sale constraints has a positive effect on the likelihood of equity issuance only when public signal is highly favorable. These results indicate widely divergent conclusions about the relations between heterogeneous beliefs as well as short sale constraints and security issuance decision.

Global Return Premiums on Earnings Quality, Value, and Size

We investigate the return premium on stocks with high earnings quality using a broad and recent global dataset covering all developed markets from 7/1988 to 6/2012. We find that a simple strategy that is long stocks with high earnings quality and short stocks with low earnings quality produces a higher Sharpe ratio than the overall market or similar strategies betting on value or small stocks. This result holds both in the overall sample as well as in the more recent time period since 2005. Because the global earnings quality portfolio has a negative correlation with a value portfolio, an investor wishing to invest in both exposures can achieve significant diversification benefits.

Are Short Sellers Informed? Evidence from the Bond Market

ABSTRACT We examine whether short sellers in the equity market provide valuable information to investors in the bond market. Using a sample of publicly traded bond data covering the period from 1988 to 2011, we find that firms with high short interest have lower credit ratings and are more likely to have their ratings downgraded. We also find that firms with highly shorted stocks are associated with higher bond yield spreads (about 24 basis points). Evidence of causality from short interest spikes and a natural experiment based on the SEC's Regulation SHO pilot program confirms our findings. Overall, our results suggest that equity short sellers provide predictive information to creditors in the bond market. JEL Classifications: G12; G14. Data Availability: Data are publicly available from the sources identified in the study with the exception of the bond data from Lehman Brothers, which is a proprietary dataset.

Short selling, stock prices, and information

Short selling, stock prices, and information

Momentum, Risk, and Underreaction

Momentum profits can be explained by exposure to risks omitted from common factor models (distress risk, idiosyncratic risk, and covariance with corporate bonds) and underreaction to innovations in these risks. Momentum strategies tend to go long risky stocks with high expected returns. Consistent with risk as a partial explanation of momentum profits, long formation period momentum strategies earn higher returns and are more highly correlated with risk factors than short formation period momentum strategies. Momentum strategies also tend to go short stocks with recent increases in risk; these stocks have low expected returns because investors underreact to risk innovations.

Ova fecundity in Scottish Atlantic salmon Salmo salar: predictions, selective forces and causal mechanisms

Ova fecundities of Scottish Atlantic salmon Salmo salar, predicted from log(10) regression of ova numbers and female fork length (L(F)), differed widely between upland and lowland stocks within the same river, whereas sea-age, river and year factors had insignificant effects on fecundity once L(F) was accounted for. For upland fish, the relationship between log(10)L(F) and log(10) ova mass (M(O)) was stable between two datasets collected 40 years apart. Although upland and lowland females both produced comparable log(10)M(O) (log(10)L(F))(-1), lowland females partitioned this into 45% more, but smaller ova, whereas upland females produced fewer, but larger, eggs. The possible causes and implications of this are discussed for evolutionary perspectives (lifetime production), population structure (local tributary v. large catchments; environmental effects), population dynamics and stability (density-dependent control mechanisms) and fisheries management (stock-recruitment; short and long-term stock sustainability).

Are Short Sellers Informed? Evidence from the Bond Market

We examine whether short sellers in the equity market provide valuable information to investors in the bond market. Using a sample of publicly traded bond data covering the period from 1988 to 2011, we find that firms with high short interest have lower credit ratings and are more likely to have their ratings downgraded. We also find that firms with highly shorted stocks are associated with higher bond yield spreads (about 24 basis points). Evidence of causality from short interest spikes and a natural experiment based on the SEC’s Regulation SHO pilot program confirms our findings. Overall, our results suggest that equity short sellers provide predictive information to creditors in the bond market.