The Effect of Short Selling on Market Reactions to Earnings Announcements

Posted: 21 Mar 2007 Last revised: 5 Nov 2009

See all articles by Dennis Lasser

Dennis Lasser

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

Xue Wang

Renmin University of China

Yan Zhang

State University of New York at Binghamton - School of Management

Date Written: August 10, 2009

Abstract

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

Lasser, Dennis and Wang, Xue and Zhang, Yan, The Effect of Short Selling on Market Reactions to Earnings Announcements (August 10, 2009). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=972128

Dennis Lasser

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

Vestal Parkway East
Binghamton, NY 13902-6015
United States
607-777-4874 (Phone)

Xue Wang (Contact Author)

Renmin University of China ( email )

Beijing
China

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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