In Short Supply: Short Sellers and Stock Returns

55 Pages Posted: 4 Dec 2013 Last revised: 19 Apr 2015

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting

Charles M.C. Lee

Stanford University - Graduate School of Business

Craig Nichols

Syracuse University

Date Written: February 27, 2015

Abstract

We examine the economic determinants of short-sale supply, and its consequences for future stock returns. Lendable supply increases with expected borrowing costs and decreases with financial statement constructs that indicate overvaluation. Although rising loan fees help ease supply, we find shares are still least available when they are most attractive to short sellers. Using a number of firm characteristics, we derive useful instruments for real-time loan supply and demand conditions in the lending market. Further, we show that (1) when lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to “special” stocks, and (3) loan fees significantly reduce the profitability of the short side and several of these anomalies cease to be profitable. Overall our evidence highlights the central role played by the supply of lendable shares in equity price formation and returns prediction.

Keywords: Short Selling, Overvaluation, Market Efficiency

JEL Classification: G14, G17, M4

Suggested Citation

Beneish, Messod Daniel and Lee, Charles M.C. and Nichols, Craig, In Short Supply: Short Sellers and Stock Returns (February 27, 2015). Rock Center for Corporate Governance at Stanford University Working Paper No. 165. Available at SSRN: https://ssrn.com/abstract=2362971 or http://dx.doi.org/10.2139/ssrn.2362971

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Craig Nichols (Contact Author)

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

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