Does Short-Selling Amplify Price Declines or Align Stocks with Their Fundamental Values?

Management Science, Forthcoming

40 Pages Posted: 5 Oct 2005 Last revised: 15 Mar 2014

See all articles by Asher Curtis

Asher Curtis

University of Washington

Neil L. Fargher

Australian National University (ANU)

Date Written: October 23, 2013

Abstract

Critics of short-selling argue that short-sellers amplify price declines by targeting firms with falling prices in an unwarranted manner. Contrary to this viewpoint, we find that increases in short-interest for firms following a price decline are associated with measures of overpricing based on financial statement analysis. Our results extend to short-selling activity following market-wide declines. We also find evidence consistent with the profitability of short-selling following price declines being driven by valuation-based positions. Overall, our findings suggest short-sellers primarily undertake valuation-based strategies following price declines and have implications for regulators. Limiting short-selling following price declines is likely to impede efficient price discovery.

Keywords: Short-selling, price declines, fundamental analysis, market regulation

JEL Classification: G12, G14, M41

Suggested Citation

Curtis, Asher and Fargher, Neil L., Does Short-Selling Amplify Price Declines or Align Stocks with Their Fundamental Values? (October 23, 2013). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=817446 or http://dx.doi.org/10.2139/ssrn.817446

Asher Curtis (Contact Author)

University of Washington ( email )

Seattle, WA 98195
United States

Neil L. Fargher

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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