The Long and the Short of it: Evidence of Year-End Price Manipulation by Short Sellers

51 Pages Posted: 23 Mar 2009 Last revised: 17 Nov 2012

See all articles by Jesse Blocher

Jesse Blocher

Vanderbilt University - Finance

Joseph Engelberg

University of California, San Diego (UCSD) - Rady School of Management

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Date Written: March 15, 2011

Abstract

We identify a setting in which there is a predictable incentive for short sellers to manipulate prices, and we find patterns consistent with short sellers manipulating prices. Specifically, we find that stocks with high short interest experience abnormally low returns on the last trading day of the year. This effect is strongest among stocks that are easily manipulated and during the last hour of trading. Further, this effect reverses at the beginning of the year, consistent with the temporary nature of price manipulation. We show that hedge funds’ portfolios are closely related to market-wide short interest, suggesting that hedge funds, with their convex compensation structures, may generate the patterns we observe. In additional analysis, we find that larger price effects are associated with higher idiosyncratic volatility, offering a potential explanation for why temporary price effects are allowed to persist in the presence of rational arbitrageurs, but we find no evidence to suggest that extended non-trading-day holding periods play a role in the magnitude of the effects. Finally, we provide evidence of mutual funds and short sellers avoiding each other, and we show that downward pressure by short sellers is outweighed by upward pressure by buyers. In other words, since short sellers’ incentives are mirrored by buyers’ incentives in the opposite direction, our experiment provides evidence that short sellers manipulate prices in much the same way buyers do, and manipulation by short sellers is no stronger than manipulation by buyers.

Keywords: Short Sales, Hedge Funds, Mutual Funds, Incentives, Manipulation

Suggested Citation

Blocher, Jesse and Engelberg, Joseph and Reed, Adam V., The Long and the Short of it: Evidence of Year-End Price Manipulation by Short Sellers (March 15, 2011). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1364835 or http://dx.doi.org/10.2139/ssrn.1364835

Jesse Blocher

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Joseph Engelberg (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Adam V. Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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