Short Sale Return Predictability Revisited: Anomaly or Return Mis-Measurement?

41 Pages Posted: 23 Feb 2011

See all articles by Zsuzsa R. Huszar

Zsuzsa R. Huszar

Corvinus University of Budapest; National University of Singapore ; Central European University

Wenlan Qian

National University of Singapore - NUS Business School

Date Written: February, 23 2011

Abstract

The empirical evidence that stocks with high aggregate shorting demand subsequently underperform is a puzzle given that the information is public. In this paper, we first confirm the return predictability of monthly short interest is not driven by new private information. Second, we show that highly shorted stocks tend to be very liquid and part of the return anomaly is attributable to inadequate liquidity adjustment. Third, the monthly significant negative returns (i.e., -0.7 to -0.6% per month) associated with high short interest are concentrated in stocks with high loan fees (i.e., high shorting costs). However, high shorting demand and high shorting cost do not necessarily imply withheld negative information, because (i) there is a significant presence of institutional investors in the highly shorted stocks and (ii) there is no evidence of informed selling by these investors following high short interest. By considering the loan fees as an implicit dividend income, the abnormal returns become economically and statistically insignificant among the highly shorted stocks with high lending fees. Thus, the significant negative return associated with high public short interest reflects return mis-measurement rather than an anomaly due to short-sale constraints.

Keywords: pricing efficiency, limits of arbitrage, short-sale constraints, informed trading, equity lending market

JEL Classification: G1

Suggested Citation

Huszar, Zsuzsa R. and Huszar, Zsuzsa R. and Qian, Wenlan, Short Sale Return Predictability Revisited: Anomaly or Return Mis-Measurement? (February, 23 2011). Fifth Singapore International Conference on Finance 2011, Available at SSRN: https://ssrn.com/abstract=1768016 or http://dx.doi.org/10.2139/ssrn.1768016

Zsuzsa R. Huszar (Contact Author)

Corvinus University of Budapest ( email )

Fővám tér 8.
Budapest, 1093
Hungary

National University of Singapore ( email )

Business School
15 Kent Ridge Drive
Singapore, 117592
Singapore
+65 6516 8017 (Phone)
+65 6779 2083 (Fax)

Central European University ( email )

Nador utca 9
Budapest, H-1051
Hungary

Wenlan Qian

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

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