Perceived Information, Short Interest, and Institutional Demand

51 Pages Posted: 14 Dec 2016 Last revised: 1 Sep 2019

See all articles by Chune Young Chung

Chune Young Chung

Chung-Ang University - College of Business & Economics

Luke DeVault

Clemson University - Department of Finance

Kainan Wang

University of Toledo

Date Written: August 1, 2019

Abstract

We test whether institutional investors’ demand relates to past arbitrage activity in the form of short interest. We find that changes in short interest positively predict institutional demand. Examining the reason for the positive relationship, we find that institutions do not appear to demand securities following increases in short interest to gain information. The securities in which the institutional demand following changes in short interest is concentrated, namely, securities with high short interest levels, low information uncertainty, and large increases in short interest, both earn returns equal to their risk-adjusted benchmarks and seem to have the least risky and most profitable share lending. The results are consistent with the idea that institutions place importance on share lending, leading to the predictability of institutional demand. Our study provides new evidence linking the behavior of professional money managers to that of sophisticated investors, such as short sellers.

Keywords: short interest, institutional herding, short-sale constrained institution, price correction

JEL Classification: G10, G11, G23

Suggested Citation

Chung, Chune Young and DeVault, Luke and Wang, Kainan, Perceived Information, Short Interest, and Institutional Demand (August 1, 2019). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2884759 or http://dx.doi.org/10.2139/ssrn.2884759

Chune Young Chung

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Luke DeVault

Clemson University - Department of Finance ( email )

Clemson, SC 29634
United States

Kainan Wang (Contact Author)

University of Toledo ( email )

Neff Department of Finance
Mail Stop 103
Toledo, OH 43606
United States

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