Traders Who Sell Short Stocks Are Well-Informed

Apr 03, 2008

The term “short selling” refers to the practice of selling shares the seller does not own, in the hope of repurchasing them later at a lower price. A new study in The Journal of Finance reveals that there is a large occurrence of shorting activity and that short sellers are highly informed about the relative value of stocks.

Led by Ekkehart Boehmer of the Mays Business School at Texas A&M University, Charles M. Jones of the Graduate School of Business at Columbia University, and Xiaoyan Zhang, of the Johnson Graduate School of Management at Cornell University, researchers used information from the New York Stock Exchange to examine the incidence and information content of short sales. Used to measure shorting flow, the sample consisted of all NYSE system order data records related to short sales from January 2000 to April 2004.

The study shows that there is a surprisingly large amount of shorting activity across both large and small NYSE stocks. During the sample period, shorting accounted for at least 12.9 % of trading volume, suggesting that shorting constraints are easily surmounted and not widespread.

The study also illustrates the extent to which short sellers are able to identify overvalued stocks and profit by anticipating price declines in these stocks. Short sellers are extremely well-informed, with institutional traders being the most informed.

The results are consistent with the emerging consensus in financial economics that short sellers possess important information, and that their trades are important contributors to more efficient stock prices.

“We think this is a promising area of research, and our high frequency data are ideal for investigating short selling immediately surrounding these kinds of corporate events,” the authors conclude.

This study is published in the April 2008 issue of The Journal of Finance.

Source: Blackwell Publishing

Explore further: UC Santa Barbara receives $65M from Munger

add to favorites email to friend print save as pdf

Related Stories

The truth about the war on wheat

Oct 03, 2014

If you believe the best-seller lists, the biggest bad in the supermarket aisles is not fat or sodium or sugar, but wheat. We have been warned that eating wheat makes our bellies fatter and triggers diseases ...

Alibaba's plan: Today, China. Tomorrow, the world.

Sep 18, 2014

Amazon and eBay should watch their backs. As Chinese e-commerce powerhouse Alibaba readies what could be the biggest initial public offering ever on the New York Stock Exchange, it is quietly hinting at plans ...

StubHub Music app takes on Live Nation in concerts

Aug 06, 2014

StubHub, the ticket reselling subsidiary of eBay Inc., is launching its StubHub Music app nationwide as it goes after core music fans in a challenge to Live Nation in the concert business.

Recommended for you

UC Santa Barbara receives $65M from Munger

17 hours ago

A physics institute at the University of California, Santa Barbara, has received a $65 million donation—the largest single gift in the university's history.

Prophet's ancient seal provides insights from antiquity

23 hours ago

When a personal artifact of a religious leader is discovered nearly 1,700 years after its use, the object provides invaluable historical insights. Zsuzsanna Gulacsi, professor of Comparative Cultural Studies, ...

Billionaires' $10m gift to Yale stirs debate in China

Oct 30, 2014

A Chinese billionaire couple's $10 million gift to Yale University sparked controversy among the country's Internet users Thursday, with some arguing that the money would be better spent on schools in China.

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.