Informed or Speculative: Short Selling Analyst Recommendations

Abstract

While this study finds consistency with the informed front-running hypothesis by documenting abnormal short selling prior to downgrades, results also show abnormal short selling prior to upgrades suggesting that short selling prior to analyst recommendations is more speculative than informed. The short selling patterns around both upgrades and downgrades are remarkably symmetric. However, we report an important asymmetry in the return predictability of short selling. Pre-downgrade short selling is better at predicting negative returns than post-downgrade short selling. The opposite appears true around upgrades. This result indicates that predicting (reacting to) negative news increases (decreases) short sellers’ profitability.