An Investigation of the Informational Role of Short Interest in the Nasdsaq Market

Abstract

This paper examines the informational role of short interest in the Nasdaq market. Using the population of monthly short interest data over the period of June 1988 through December 1994 we find that firms with high short interest experience significant negative abnormal returns ranging from -0.76% to -1.13% per month during the period over which they are heavily shorted. In contrast to results in Aitken et al. (1998) that show that information in short interest is incorporated quickly into prices for Australian stocks, we find that information in short interest is incorporated gradually into prices for Nasdaq stocks. The negative excess returns are increasing in the level of short interest indicating that a higher level of short interest is a stronger signal. Consistent with short interest being a bearish signal, we find that the heavily shorted firms get delisted with a higher frequency relative to their size and industry matched control firms.

Keywords: Short interest, information, stock returns

JEL Classification: G10, D82, G14