Short Selling and the Price Discovery Process
Singapore Management University - Lee Kong Chian School of Business
Juan (Julie) Wu
University of Georgia
July 16, 2012
Review of Financial Studies, Forthcoming
We show that stock prices are more accurate when short sellers are more active. First, in a large panel of NYSE-listed stocks, intraday informational efficiency of prices improves with greater shorting flow. Second, at monthly and annual horizons, more shorting flow accelerates the incorporation of public information into prices. Third, greater shorting flow reduces post-earnings announcement drift for negative earnings surprises. Fourth, short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values. These results are robust to various econometric specifications and their magnitude is economically meaningful.
Number of Pages in PDF File: 52
Keywords: Informational efficiency of prices, short selling, post-earnings announcement drift, arbitrage
JEL Classification: G14
Date posted: March 20, 2007 ; Last revised: July 18, 2012
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 1.156 seconds