Short Selling and the Price Discovery Process

Review of Financial Studies, Forthcoming

52 Pages Posted: 20 Mar 2007 Last revised: 18 Jul 2012

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

J. (Julie) Wu

University of Nebraska at Lincoln

Date Written: July 16, 2012

Abstract

We show that stock prices are more accurate when short sellers are more active. First, in a large panel of NYSE-listed stocks, intraday informational efficiency of prices improves with greater shorting flow. Second, at monthly and annual horizons, more shorting flow accelerates the incorporation of public information into prices. Third, greater shorting flow reduces post-earnings announcement drift for negative earnings surprises. Fourth, short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values. These results are robust to various econometric specifications and their magnitude is economically meaningful.

Keywords: Informational efficiency of prices, short selling, post-earnings announcement drift, arbitrage

JEL Classification: G14

Suggested Citation

Boehmer, Ekkehart and Wu, J. (Julie), Short Selling and the Price Discovery Process (July 16, 2012). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=972620 or http://dx.doi.org/10.2139/ssrn.972620

Ekkehart Boehmer (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

J. (Julie) Wu

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

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