Do Short-Selling Prophets Currently Profit from Short Selling Around Earnings Announcements?

Abstract:     
We examine short-sale constraints and short selling profits around earnings announcements in the current environment. We find limited, if any, evidence of significant short-sale constraints prior to earnings announcements based on trading and return patterns. We also find limited evidence that short sellers trade profitably based on private information. The most notable exception is that pre-announcement short positions in constrained firms vary inversely with announcement period returns even after controlling for the normal, non-event relation between current shorts and future returns. This evidence suggests that short sellers in constrained firms may have a competitive edge in obtaining and trading on private information. However, the evidence is much stronger that short sellers profit from their abilities to process the information in earnings announcements than that they trade on private information. Our findings provide an important, announcement-specific application of Diether et al.’s (2009) general findings that short sellers correct temporary overvaluations of stock prices.

Number of Pages in PDF File: 41

Keywords: short selling, earnings announcements, short-sale constraints

working papers series