Short Interests, Fundamental Analysis, and Stock Returns

35 Pages Posted: 24 Jul 1999

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

Amy P. Hutton

Boston College - Carroll School of Management

Lisa K. Meulbroek

Claremont McKenna College - Robert Day School of Economics and Finance

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: May 1999

Abstract

Firms with low ratios of fundamentals (such as earnings and book values) to market values are known to have systematically lower future stock returns. We document that short-sellers position themselves in the stock of such firms, and then cover their positions as the ratios revert to normal levels. We also show that short-sellers avoid firms where the transaction costs of short-selling are high and where the low ratios are due to temporarily low fundamentals, rather than temporarily high prices. Our evidence suggest that short-sellers use information in these ratios about either (i) temporary mispricing, or (ii) unknown risk factors, to boost their investment returns.

JEL Classification: G12, G14, M41

Suggested Citation

Dechow, Patricia and Hutton, Amy P. and Meulbroek, Lisa K. and Sloan, Richard G., Short Interests, Fundamental Analysis, and Stock Returns (May 1999). Available at SSRN: https://ssrn.com/abstract=167154 or http://dx.doi.org/10.2139/ssrn.167154

Patricia Dechow (Contact Author)

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Amy P. Hutton

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

Lisa K. Meulbroek

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-7363 (Phone)

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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