Shorting Activity and Stock Return Predictability: Evidence From a Mandatory Disclosure Shock

54 Pages Posted: 7 Jun 2021

See all articles by Paul A. Griffin

Paul A. Griffin

University of California, Davis - Graduate School of Management

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Ivalina Kalcheva

University of Texas at San Antonio - Department of Finance

Jeong-Bon Kim

City University of Hong Kong

Date Written: May 30, 2021

Abstract

We study the effect of a mandatory improvement in public disclosure due to the adoption of International Financial Reporting Standards (IFRS) on the stock return predictability of shorting activity. To assess the impact of the disclosure shock, we measure monthly changes in the demand for and supply of stocks for shorting and whether those changes predict negative returns in the following month. We provide international evidence that the ability of increases in shorting demand and supply to predict negative returns declines after the shock. The predictive ability of shorting in the month before a negative earnings surprise and news of a firm’s questionable M&A transaction also declines after the shock. These findings imply that the shock of the mandatory accounting change crowds out some of short-sellers’ value-relevant information in the equity lending market. Thus, while the democratization of information from a structured accounting change may make sophisticated investors worse off by reducing their ability to predict future returns, this change may also benefit all investors through timely stock price discovery.

Keywords: Shorting activity; Equity lending market; Stock return predictability; Mandatory disclosure shock; IFRS.

JEL Classification: G12, G14, G30, M41.

Suggested Citation

Griffin, Paul A. and Hong, Hyun A. and Kalcheva, Ivalina and Kim, Jeong-Bon, Shorting Activity and Stock Return Predictability: Evidence From a Mandatory Disclosure Shock (May 30, 2021). Available at SSRN: https://ssrn.com/abstract=3856334 or http://dx.doi.org/10.2139/ssrn.3856334

Paul A. Griffin

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Ivalina Kalcheva

University of Texas at San Antonio - Department of Finance

San Antonio, TX 78249
United States

Jeong-Bon Kim (Contact Author)

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

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