Trading on Fluffy News: The Effect of Information Tangibility on Short Sellers’ Behavior

Abstract

We investigate how short sellers strategically exploit the liquidity generated by the arrival of ambiguous information – i.e. information likely to cause disagreement in interpretation. Using a sample of newspaper articles, media newswires, and press releases, we construct a measure of information tangibility as the ratio of numbers to the total words in an article. First, we show that noise trading increases in the presence of “fluffy” news – i.e. news which has little numerical content. Measures of stock liquidity increase and the news-day return mean-reverts more on days with intangible news releases. Second, we find that short sellers exploit this increase in noise trading to place their informed trades. Moreover, intangibility has a bigger effect on short sellers’ trading after an exogenous decrease in liquidity following a deletion of the stock from the S&P 500 index. At the same time, it has a lower effect when investor attention is more distracted otherwise – e.g. during significant sporting events. We rule out the alternative explanation of short sellers’ superior ability to interpret qualitative news by showing that their trades on days with such news do not predict future stock returns better. Overall, our results indicate that short sellers exploit additional liquidity around media events to place their informed trades.

Keywords: Short selling, Information, Liquidity

JEL Classification: G10, G12, G14