Short Sellers and the Informativeness of Stock Prices with Respect to Future Earnings

46 Pages Posted: 16 Jun 2012 Last revised: 8 Jan 2015

See all articles by Michael S. Drake

Michael S. Drake

Brigham Young University - Marriott School

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Michael D. Stuart

Vanderbilt University - Accounting

Date Written: May 1, 2014

Abstract

In this paper, we examine whether short interest improves the informativeness of stock prices with respect to future earnings. We find that short selling strengthens the relation between current returns and future earnings, especially in settings where short sellers are likely to possess an information advantage, such as when a firm’s information environment is weak or when analysts are highly optimistic about future earnings growth. Collectively, our results illustrate the important role that short sellers play in improving the extent to which current stock prices reflect information about future earnings and thus, in improving market efficiency.

Keywords: Short sellers, short interest, future earnings response coefficient (FERC), market efficiency

JEL Classification: G17, M40, M41

Suggested Citation

Drake, Michael S. and Myers, James N. and Myers, Linda A. and Stuart, Michael D., Short Sellers and the Informativeness of Stock Prices with Respect to Future Earnings (May 1, 2014). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2085019 or http://dx.doi.org/10.2139/ssrn.2085019

Michael S. Drake (Contact Author)

Brigham Young University - Marriott School ( email )

United States

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Michael D. Stuart

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

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