Information Processing Skills of Short Sellers

Abstract

We investigate to what extent short sellers rely on superior information processing skills, to evaluate public (macro) information, and to what extent they rely on private (company specific) information. To distinguish these two sources of information, our study contrasts short-seller trade-level performance in non-healthcare stocks during the 2020 pandemic period, to their per-formance in healthcare stocks during an earlier clean period. Since we expect that any short sellers’ private information about healthcare stocks is unlikely to be material for non-healthcare stocks, we conclude that any observed outperformance in non-healthcare stocks is more likely relying on successful processing of public information. Using a unique German sample of daily short selling data, we find that treated short positions identified by general shorting outperfor-mance are associated with economically significant 10-day CARs for non-healthcare stocks of 3.4 percent. Robustness test rule out that our results are driven by the use of private information on firms, governmental measures or non-information-based trading advantages such as better funding or lending ability of observed short sellers.

Keywords: short sales; healthcare; Covid-19, information processing skills; private information

JEL Classification: G14, G23