Short Interests, Fundamental Analysis, and Stock Returns
Patricia M. Dechow
University of California, Berkeley - Haas School of Business
Amy P. Hutton
Boston College - Carroll School of Management
Lisa K. Meulbroek
Claremont Colleges - Robert Day School of Economics and Finance
Richard G. Sloan
University of California at Berkeley - Haas School of Business
Firms with low ratios of fundamentals (such as earnings and book values) to market values are known to have systematically lower future stock returns. We document that short-sellers position themselves in the stock of such firms, and then cover their positions as the ratios revert to normal levels. We also show that short-sellers avoid firms where the transaction costs of short-selling are high and where the low ratios are due to temporarily low fundamentals, rather than temporarily high prices. Our evidence suggest that short-sellers use information in these ratios about either (i) temporary mispricing, or (ii) unknown risk factors, to boost their investment returns.
Number of Pages in PDF File: 35
JEL Classification: G12, G14, M41working papers series
Date posted: July 24, 1999
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