The Good News in Short Interest
Zsuzsa R. Huszar
National University of Singapore; National University of Singapore (NUS) - Risk Management Institute; National University of Singapore (NUS) - Institute of Real Estate Studies
Bradford D. Jordan
University of Kentucky - Gatton College of Business and Economics
February 24, 2007
AFA 2008 New Orleans Meetings Paper
We study the information content in short interest data using NASDAQ-listed stocks from 1988 to 2004. We show that stocks with relatively high short interest subsequently experience negative abnormal returns. However, this effect is generally limited to larger stocks and is of debatable economic significance. In contrast, we find that intensively traded stocks with low short interest experience both statistically and economically significant positive abnormal returns. These positive returns are much larger (in absolute value) and more persistent than the negative returns observed for highly shorted stocks. Because we show that stocks with greater short interest are less mispriced, we provide support for the hypothesis that short selling promotes market efficiency. However, we also show that positive information in publicly-available short interest data is only slowly incorporated into prices, thereby raising a significant market efficiency issue. Our results also cast serious doubt on existing theories of the impact of short sale constraints.
Number of Pages in PDF File: 51
Keywords: short sales, short interest, short sale constraints, market efficiency
JEL Classification: G12, G14working papers series
Date posted: March 20, 2007
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