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Short Selling and the Price Discovery Process

Ekkehart Boehmer

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

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Date posted: March 20, 2007 ; Last revised: July 18, 2012

Suggested Citation

Boehmer, Ekkehart and Wu, Juan (Julie), Short Selling and the Price Discovery Process (July 16, 2012). Review of Financial Studies, Forthcoming. Available at SSRN: http://ssrn.com/abstract=972620 or http://dx.doi.org/10.2139/ssrn.972620

Contact Information

Ekkehart Boehmer (Contact Author)
Singapore Management University - Lee Kong Chian School of Business ( email )

Juan (Julie) Wu
University of Georgia ( email )
Dept. of Finance, Terry College of Business
University of Georgia
Athens, GA 30602-6254
United States
HOME PAGE: http://www.terry.uga.edu/directory/profile/juliewu/
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