The Information Content of Short Interest: A Natural Experiment

Posted: 19 Jan 2004

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

Timothy Falcon Crack

University of Otago - Department of Accountancy and Finance

Yan Zhang

State University of New York at Binghamton - School of Management

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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 Taxpayer 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 strengthens the negative relationship between short interest and subsequent stock price performance post-TRA97.

Keywords: Short interest, Short sale against the box, Taxpayer Relief Act of 1997

JEL Classification: G10, G14, H29

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. Journal of Business, Forthcoming. Available at SSRN: https://ssrn.com/abstract=487383

Thomas M. Arnold

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States
804-287-6399 (Phone)
804-289-8878 (Fax)

Alexander W. Butler (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Timothy Falcon Crack

University of Otago - Department of Accountancy and Finance ( email )

Dunedin
New Zealand

Yan Zhang

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-6195 (Phone)
607-777-4422 (Fax)

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