Retail Short Selling and Stock Prices

59 Pages Posted: 11 Sep 2013 Last revised: 23 Aug 2016

Eric K. Kelley

University of Tennessee

Paul C. Tetlock

Columbia Business School - Finance and Economics

Date Written: August 22, 2016

Abstract

Using proprietary data on millions of trades by retail investors, we provide the first large-scale evidence that retail short selling predicts negative stock returns. A portfolio that mimics weekly retail shorting earns an annualized risk-adjusted return of 9%. The predictive ability of retail short selling lasts for one year and is not subsumed by institutional short selling. In contrast to institutional shorting, retail shorting best predicts returns in small stocks and those that are heavily bought by other retail investors. Our findings are consistent with retail short sellers having unique insights into the retail investor community and small firms' fundamentals.

Keywords: short selling, retail investor, informed trading, return predictability, market efficiency

JEL Classification: G00, G10, G12, G14

Suggested Citation

Kelley, Eric K. and Tetlock, Paul C., Retail Short Selling and Stock Prices (August 22, 2016). Columbia Business School Research Paper No. 13-70. Available at SSRN: https://ssrn.com/abstract=2322830 or http://dx.doi.org/10.2139/ssrn.2322830

Eric K. Kelley

University of Tennessee ( email )

916 Volunteer Blvd
Knoxville, TN 37996
United States

Paul C. Tetlock (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9895 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ptetlock/

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