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

51 Pages Posted: 9 Dec 2016 Last revised: 23 Oct 2017

Pedram Nezafat

Michigan State University

Tao Shen

Tsinghua University

Qinghai Wang

University of Central Florida - College of Business Administration

J. (Julie) Wu

University of Nebraska at Lincoln

Date Written: October 10, 2017

Abstract

We measure investor disagreement with observed short interest and long positions of hedge funds and show that disagreements about firms’ prospects are prevalent among active, sophisticated investors. During the period 1997-2014, 30% of highly shorted stocks also had the highest level of hedge fund ownership. Stocks with both high short interest and high hedge fund holdings do not earn abnormal returns, while stocks with high short interest but low hedge fund holding or stocks with high hedge fund holding but low short interest exhibit significant abnormal returns that are consistent with the expressed views of the active investors. The evidence suggests that studies of informed trading such as short selling should consider the overall trading activity and particularly the disagreements of informed investors.

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 (October 10, 2017). Available at SSRN: https://ssrn.com/abstract=2882250 or http://dx.doi.org/10.2139/ssrn.2882250

Pedram Nezafat (Contact Author)

Michigan State University ( email )

MI
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 at Lincoln ( email )

Lincoln, NE 68588
United States

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