Why Do Short Interest Levels Predict Stock Returns?

32 Pages Posted: 5 Oct 2007

See all articles by Ekkehart Boehmer

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Bilal Erturk

Texas A&M University - Department of Finance

Sorin M. Sorescu

Texas A&M University - Department of Finance

Date Written: October 4, 2007

Abstract

High levels of short interest predict negative abnormal returns, but the reasons for this predictability are not well understood. Moreover, two popular explanations suggest very different interpretations. According to Miller (1977), stocks are overvalued in the presence of short-sale constraints and the subsequent negative abnormal returns represent a correction of this overvaluation. In contrast, Diamond and Verrecchia's (1987) information-based explanation does not presume that stocks are mispriced. Instead, short-sellers are regarded as traders who have information about future returns. We discriminate between the two explanations and find support for the information-based explanation. Therefore, our evidence suggests that short sellers incorporate value-relevant information into prices.

Keywords: Short selling, short interest, overvaluation, stock returns

JEL Classification: G12, G14

Suggested Citation

Boehmer, Ekkehart and Erturk, Bilal and Sorescu, Sorin M., Why Do Short Interest Levels Predict Stock Returns? (October 4, 2007). Available at SSRN: https://ssrn.com/abstract=1019309 or http://dx.doi.org/10.2139/ssrn.1019309

Ekkehart Boehmer (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Bilal Erturk

Texas A&M University - Department of Finance ( email )

360 Wehner
College Station, TX 77843-4218
United States

Sorin M. Sorescu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

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