Digesting the Profitability and Investment Premiums: Evidence from the Short Selling Activity

Posted: 23 Jan 2017

See all articles by Yizhi Wang

Yizhi Wang

Australian National University (ANU) - College of Business and Economics

Qiaoqiao Zhu

Australian National University (ANU) - College of Business and Economics; Financial Research Network (FIRN)

Date Written: January 21, 2017

Abstract

This paper highlights the effects of short selling activity on the profitability and investment premiums. Recently, Fama and French (2015) extend their three-factor asset pricing model by adding profitability and investment factors. Using short interest as a proxy to measure the short selling activity, we find that the stocks without shorting show significant higher profitability premium, while short selling activity has no impact on the investment premium. We also provide evidence that the profitability premium is more likely than the investment premium to be associated with the sentiment-driven mispricing, and short sellers are skilled at eliminating sentiment-driven mispricing. Collectively, our results suggest that the two new Fama-French factors have different underlying attributions. While the profitability premium is more consistent with cash flow-based interpretation, the investment premium is more consistent with risk-based interpretation.

Keywords: Profitability, Investment, Short Selling, Investor Sentiment

JEL Classification: G12, G14

Suggested Citation

Wang, Yizhi and Zhu, Qiaoqiao, Digesting the Profitability and Investment Premiums: Evidence from the Short Selling Activity (January 21, 2017). Available at SSRN: https://ssrn.com/abstract=2903045 or http://dx.doi.org/10.2139/ssrn.2903045

Yizhi Wang (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

Qiaoqiao Zhu

Australian National University (ANU) - College of Business and Economics ( email )

Canberra, Australian Capital Territory 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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