Skewness, Short Sale Constraints, and the Asymmetric Price Response to Earnings Announcements
Benjamin M. Blau
Utah State University - Huntsman School of Business
J. Michael Pinegar
Brigham Young University - Marriott School of Management
Ryan J. Whitby
Utah State University
July 1, 2013
Much of traditional asset pricing theory relies on the assumption of normality in the return distribution and mean-variance efficiency. However, empirical tests show return skewness at both the market level and for individual stocks. In this study, we follow a growing body of research that examines the effects of short sale constraints on stock price responses to market signals and explore how these factors relate to return skewness. Consistent with theory in Xu (2007), we find that price responses following earnings announcements are more convex for firms that have tighter short sale constraints and for firms where there appears to be greater disagreement among investors. We also find that price convexity is a key determinant in contemporaneous skewness. Lastly, we find that, after controlling for short sale constraints, short interest is negatively related to skewness. This relation is consistent with the notion that short selling can reduce both the asymmetric price response to earnings announcements and skewness in individual stock returns and help normalize return distributions.
Number of Pages in PDF File: 38
Keywords: skewness, earnings announcements, short sale constraints
Date posted: January 12, 2009 ; Last revised: July 1, 2013
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