Longs, Shorts, and the Cross-Section of Stock Returns
51 Pages Posted: 9 Dec 2016 Last revised: 23 Oct 2017
Date Written: October 10, 2017
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: Suggested Citation