Short Arbitrage and Market Anomalies

Abstract:     
We contribute comprehensive evidence on short arbitrage of a broad range of well-known financial anomalies including accruals (ACC), asset growth (AG), net equity issues (NS), external financing (XFIN), financial distress (CHS), profitability (ROE), and earnings surprises (SUE). First, short sellers are more active on the short side of these anomalies where lower future returns are expected. Second, short arbitrage is less pronounced among firms with severe short sale constraints, which produces stronger market anomalies among these firms. Third, the abnormal negative returns to high short interest stocks and the negative short interest-return relation are significantly weakened, and even eliminated in some cases, when the anomaly variables are controlled for, suggesting that market anomalies are the primary driver for the return patterns associated with short interest.

Number of Pages in PDF File: 51

Keywords: Short selling, financial market anomaly, short arbitrage

JEL Classification: G12, G14

working papers series