Are Short Sellers Informed? Evidence from the 2007–2008 Subprime Mortgage Crisis

Posted: 5 Jan 2012

See all articles by Ming Liu

Ming Liu

International University of Japan; International University of Japan

Tongshu Ma

Binghamton University

Yan Zhang

State University of New York at Binghamton - School of Management

Date Written: February 2012

Abstract

This paper examines the short selling activities around financial firms’ announcements of asset write‐downs during the 2007–2008 subprime mortgage crisis. We find that short sellers accumulate short positions prior to write‐down announcements, and that stocks experience significantly negative returns around such announcements. These results suggest that the return predictability of short interests is due to short sellers’ informational advantage. Furthermore, we show that short sellers increase their positions significantly in the announcement month and keep increasing their positions afterward, suggesting the feedback effect of the disclosed write‐downs on financial firms’ existing exposures. The valuable information contained in the short interest should encourage regulators to mandate stock exchanges disclose short selling activities more frequently.

Keywords: short selling, financial crisis, subprime mortgage, asset write‐downs

JEL Classification: G14, G18

Suggested Citation

Liu, Ming and Ma, Tongshu and Zhang, Yan, Are Short Sellers Informed? Evidence from the 2007–2008 Subprime Mortgage Crisis (February 2012). Financial Review, Vol. 47, Issue 1, pp. 199-218, 2012. Available at SSRN: https://ssrn.com/abstract=1980043 or http://dx.doi.org/10.1111/j.1540-6288.2011.00326.x

Ming Liu

International University of Japan ( email )

Yamato-machi
Niigata-ken 949-7277
United States

International University of Japan ( email )

Yamato-machi
Niigata-ken 949-7277
United States

Tongshu Ma

Binghamton University ( email )

PO Box 6001
Binghamton, NY 13902-6000
United States

Yan Zhang

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-6195 (Phone)
607-777-4422 (Fax)

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