Why Do Firms Disagree With Short Sellers? Managerial Myopia versus Private Information

Abstract

Though short sellers on average succeed at identifying overvalued equity, firms often signal disagreement with short sellers by repurchasing stock when short interest increases. We investigate whether this disagreement reflects a myopic defense of inflated prices, or positive private information. These repurchases appear motivated by managers' private information, not agency issues, even when managerial benefits to short-termism are enhanced or monitoring is weaker. Managers' informational advantage relates to subsequent news, earnings, and risk, but is attenuated if activists target management or insiders sell. A trading strategy based on our findings earns 7.5% annually.

Keywords: Share repurchase, short selling, managerial myopia, informed trading, private information

JEL Classification: G14, G30, G35