Longs, Shorts, and the Cross-Section of Stock Returns

82 Pages Posted: 9 Dec 2016 Last revised: 13 Jan 2022

See all articles by Pedram Nezafat

Pedram Nezafat

University of Michigan at Ann Arbor - Finance

Tao Shen

Tsinghua University

Qinghai Wang

University of Central Florida - College of Business Administration

J. (Julie) Wu

University of Nebraska - Lincoln

Date Written: December 1, 2021

Abstract

We study the relation between severe investor disagreement and stock returns based on the observed short-interest and long positions of hedge funds. We show strong disagreements are prevalent among active, sophisticated investors. From 1997 to 2014, 30% of highly shorted stocks have high hedge fund ownership, but these stocks do not earn abnormal returns. Evidence shows that large simultaneous holdings of short sellers and hedge fund managers likely arise from their information-acquisition activities. Although active long or short positions on average predict subsequent stock returns, neither long investors nor short sellers consistently prevail when the two sides disagree.

Keywords: Short Selling, Hedge Funds, Stock Returns, Disagreement, Dispersions in Analysts' Forecasts

JEL Classification: G10, J12

Suggested Citation

Nezafat, Pedram and Shen, Tao and Wang, Qinghai and Wu, J. (Julie), Longs, Shorts, and the Cross-Section of Stock Returns (December 1, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2882250 or http://dx.doi.org/10.2139/ssrn.2882250

Pedram Nezafat (Contact Author)

University of Michigan at Ann Arbor - Finance ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Tao Shen

Tsinghua University ( email )

Department of Finance
School of Economics and Management
China

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

J. (Julie) Wu

University of Nebraska - Lincoln ( email )

730 N. 14th Street
Lincoln, NE 68588
United States

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