The Effect of Short Selling on Market Reactions to Earnings Announcements
Posted: 21 Mar 2007 Last revised: 5 Nov 2009
Date Written: August 10, 2009
This paper examines the effect of the inherent demand implied by short interest by observing price reactions to earnings announcements based on the level of short interest. We find that for extreme good- and bad- news events, the inherent demand increases stock prices around the earnings announcement date, with the effect being stronger for good news relative to bad news. Specifically, the initial market reaction to an extreme positive earnings surprise is larger for firms with high levels of short interest. On the other hand, for an extreme negative earnings surprise event, the initial market reaction is smaller for heavily shorted firms. Furthermore, the initial rightward demand curve shift caused by the short sellers' reaction to an extreme good (bad) news event also results in a smaller (larger) post-earnings-announcement drift.
Keywords: Short interest, post-earnings-announcement drift, demand curves
JEL Classification: G14, M41
Suggested Citation: Suggested Citation