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Abstract:
Thus this paper identifies one of the few situations in which there are clear, ex-ante predictions about exactly how short sellers would manipulate prices, and in this setting, we find patterns consistent with end-of-year price manipulation by short-sellers. Specifically, we find stocks with high short interest experience abnormally low returns on the last trading day of the year. This effect is strongest among stocks that are easily manipulated, strongest during the last hour of the trading, and the effect reverses at the beginning of the year; four findings that are consistent with temporary price manipulation by short sellers. Furthermore, we find a large increase in end-of-day short sales on the last day of the year, giving direct evidence that short sales contribute to the return pattern. We show that hedge funds’ portfolios are closely related to the market-wide short interest, and we argue that hedge funds’ convex pay structure generates incentives that may lead to the behavior we observe. Finally, we show that if mutual funds’ long positions and short-sellers short positions are of similar size, then there are decreases in volume consistent with short-sellers and mutual funds avoiding each other’s target stocks. We also see that, on average, upward manipulation pressure by mutual funds outweighs downward pressure by short-sellers, but among stocks with high holdings and among stocks with high end-of-day volume, downward pressure is stronger than upward pressure.
Short Sales, Hedge Funds, Mutual Funds, Incentives, Manipulation
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