The Information Content of Short Interest: A Natural Experiment

Arnold, Tom; Butler, Alexander W.; Crack, Timothy Falcon; Zhang, Yan

doi:10.2139/ssrn.299393

The Information Content of Short Interest: A Natural Experiment

43 Pages Posted: 8 Feb 2002

See all articles by Tom Arnold

Tom Arnold

University of Richmond - E. Claiborne Robins School of Business

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Yan Zhang

State University of New York at Binghamton - School of Management

There are 2 versions of this paper

Date Written: January 2002

Abstract

An increase in the cost of short selling should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market (Diamond and Verrecchia, 1987). We extend the Diamond and Verrecchia model to include short selling against the box and we test the extended model using a natural experiment based around the Tax Payer Relief Act of 1997 (TRA97). TRA97 made short selling more costly for those shorting against the box. Consistent with the implications of our extended model, this increase in short selling costs strengthened the negative relationship between short interest and subsequent stock performance post-TRA97.

Keywords: Sort Interest, Short Sale Against the Box, Tax Payer Relief Act of 1997

JEL Classification: G10, G14, H29

Suggested Citation: Suggested Citation

Arnold, Thomas M. and Butler, Alexander W. and Crack, Timothy Falcon and Zhang, Yan, The Information Content of Short Interest: A Natural Experiment (January 2002). Available at SSRN: https://ssrn.com/abstract=299393 or http://dx.doi.org/10.2139/ssrn.299393