Retail Short Selling and Stock Prices
Eric K. Kelley
University of Tennessee
Paul C. Tetlock
Columbia Business School - Finance and Economics
May 1, 2016
Columbia Business School Research Paper No. 13-70
Using proprietary data on millions of trades by retail investors, we provide the first large-scale evidence that retail short selling predicts negative stock returns. A portfolio that mimics weekly retail shorting earns an annualized risk-adjusted return of 9%. The predictive ability of retail short selling persists after controlling for known predictors of returns, including institutional short selling. In contrast to institutional shorting, retail shorting best predicts returns in small stocks and those that are heavily bought by other retail investors. Our findings are consistent with retail short sellers having unique insights into the retail investor community and small firms' fundamentals.
Number of Pages in PDF File: 52
Keywords: short selling, retail investor, informed trading, return predictability, market efficiency
JEL Classification: G00, G10, G12, G14
Date posted: September 11, 2013 ; Last revised: May 6, 2016
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