informed_shorts - WHICH SHORTS ARE INFORMED? Ekkehart...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: WHICH SHORTS ARE INFORMED? Ekkehart Boehmer Mays Business School Texas A&M University Charles M. Jones Graduate School of Business Columbia University Xiaoyan Zhang Johnson Graduate School of Management Cornell University This draft: November 11, 2005 We are grateful to Yakov Amihud, Amy Edwards, Joel Hasbrouck, Terry Hendershott, Owen Lamont, Mark Seasholes, Sorin Sorescu, Michela Verardo, Ingrid Werner, and seminar participants at Cornell, Goldman Sachs Asset Management, the London School of Economics, the NBER Market Microstructure meeting, and the NYSE for helpful comments. We thank the NYSE for providing system order data. WHICH SHORTS ARE INFORMED? Abstract We use a long, recent panel of proprietary system order data from the New York Stock Exchange to examine the incidence and information content of various kinds of short sale orders. On average, at least 12.9% of NYSE volume involves a short seller. As a group, these short sellers are extremely well-informed. Stocks with relatively heavy shorting underperform lightly shorted stocks by a risk-adjusted average of 1.07% in the following 20 days of trading (over 14% on an annualized basis). Large short sale orders are the most informative. In contrast, when more of the short sales are small (less than 500 shares), stocks tend to rise in the following month, indicating that these orders are uninformed. We partition short sales by account type: individual, institutional, member-firm proprietary, and other, and we can distinguish between program and non-program short sales. Institutional non-program short sales are the most informative. Compared to stocks that are lightly shorted by institutions, a portfolio of stocks most heavily shorted by institutions on a given day underperforms by a risk-adjusted average of 1.36% in the next month (over 18% annualized). These alphas do not account for the cost of shorting, and they cannot be achieved by outsiders, because the internal NYSE data that we use are not generally available to market participants. But these findings indicate that institutional short sellers have identified and acted on important value-relevant information that has not yet been impounded into price. The results are strongly consistent with the emerging consensus in financial economics that short sellers possess important information, and their trades are important contributors to more efficient stock prices. WHICH SHORTS ARE INFORMED? A number of theoretical models, beginning with Miller (1977) and Harrison and Kreps (1978), show that when short selling is difficult or expensive, stocks can become overvalued as long as investors agree to disagree on valuations. There is a horde of much more recent empirical evidence which uniformly supports this proposition. There is now a consensus, at least in the financial economics literature if not on Main Street, that short sellers occupy a fairly exalted position in the pantheon of investors for their role in keeping prices in line....
View Full Document

This note was uploaded on 12/08/2011 for the course CIS 625 taught by Professor Michaelkearns during the Spring '12 term at Pennsylvania State University, University Park.

Page1 / 48

informed_shorts - WHICH SHORTS ARE INFORMED? Ekkehart...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online