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

49 Pages Posted: 3 Feb 2017 Last revised: 1 Jul 2019

See all articles by Leonce Bargeron

Leonce Bargeron

University of Kentucky - Gatton College of Business and Economics

Alice A. Bonaime

University of Arizona

Date Written: June 27, 2019

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

Suggested Citation

Bargeron, Leonce and Bonaime, Alice A., Why Do Firms Disagree With Short Sellers? Managerial Myopia versus Private Information (June 27, 2019). Available at SSRN: https://ssrn.com/abstract=2910573 or http://dx.doi.org/10.2139/ssrn.2910573

Leonce Bargeron

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-4397 (Phone)

Alice A. Bonaime (Contact Author)

University of Arizona ( email )

Eller College of Management
Department of Finance
Tucson, AZ 85721
United States

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