Short selling, and its informational role in the formation of stock prices have been the epicenter of prior literature. Is there a relationship between short selling and abnormal returns? While numerous studies found a negative relationship, researchers do not unanimously agree on the existence, nor the strength, of this relationship. Using net short positions extracted from the registry of the FI for stocks listed in the OMX Stockholm 30 Exchange from January 2017 to December 2020, we examine this relationship exclusively in Sweden. The results have been scrutinized via regression analysis to verify if there is any significant relationship between the announcements of total net short positions and the non-adjusted, as well as the risk-adjusted abnormal returns. We did not find enough evidence to validate previous studies that supported the notion that heavily shorted stocks generate negative abnormal returns for the long buyers. There was a perceptible increase in both risk-adjusted and non-adjusted abnormal returns within a three-day window after the announcement of a short position. Yet, the value was merely zero, inferring that a higher level of short interest does not lead to negative stock returns.

In this thesis, I use two strategies of inquiry to further our understanding of indirect short-selling constraints. First, I interview a series of experienced market practitioners to identify their attitudes towards indirect constraints. I find little support for D’Avolio’s (2002) suggestions that short-selling is inhibited by managers’ fear of tracking error and by the cultural pressures of a society that can vilify short-sellers. However, I am able to introduce a new, social, indirect constraint to the literature – the perception that short-selling is a form of ‘trading’ as distinct from ‘investment’, and the consequent lack of acceptance amongst stakeholders that this engenders. This constraint reveals a divide between the attitudes of the academic community and parts of the institutional practitioner community on the subject of short-selling. However, interviewees argue that this indirect constraint is diminishing over time. This raises the prospect of markets in practice converging in behaviour towards the markets assumed in classical asset pricing models, and has implications for market efficiency. My second strategy of inquiry is to use a large, new stock lending database to explore three risk-related indirect constraints to short-selling. I examine ‘crowded exits’, a general class of liquidity problem, and find that these are associated with statistically and economically significant losses for short-sellers. I also examine ‘manipulative short squeezes’, a liquidity problem arising from predatory trading. Consistent with theory and the literature on the subject, I find that these are rare for larger, more liquid stocks. However, when they do occur, these events generate statistically significant losses for short-sellers. Finally, I build upon the work of Gamboa-Cavazos and Savor (2007) and investigate the response of short-sellers to losses. I find that short-sellers close their positions in response to accounting losses and not simply in response to rising share prices. This is consistent with short-sellers’ use of risk management tools that are designed to crystallize small losses. These serve to limit the risk of potentially unlimited losses and to reduce short positions at times of heightened synchronization risk. Stocks subject to shortcovering in this manner do not subsequently under-perform the market. My findings demonstrate that a sophisticated group of traders, strongly associated with price setting, does not suffer from the bias known as loss realization aversion.

Thesis (Ph.D.)--University of Texas at Dallas, 2008. / Includes vita. Includes bibliographical references (leaves 81-84)

Thesis (Ph. D.)--University of Washington, 2007. / Vita. Includes bibliographical references (leaves 98-100).

In this paper, the impact of significant short selling disclosures (> 0.5%) on returns and trading activity is studied. By investigating how Swedish small cap shares are impacted through an event study on the returns and analysing the change in daily volume and turnover, our study contributes with a Swedish perspective to the short selling literature. Short selling is widely debated, where some scholars argue that it improves market efficiency and price informativeness, while others argue that it is damaging for liquidity and leads to abnormally negative returns. Following the 2008 financial crisis, authorities around the world increased the regulation on short selling. Subsequently, in 2012 the European Securities and Markets Authority mandated a reporting threshold of 0.5% on net short positions on traded securities (ESMA, 2022). We find insignificant CARs after a disclosure, where the closest to significance is the (0,1) window with a CAR of 1.08%, contradicting previous research on short-term impact (Aitken et al.,1998) and how small cap firms are affected (Israel & Moskowitz, 2013; Asquith et al., 2005). We detect no significant change in trading activity in the five or ten trading days after a disclosure. Small cap is not deemed to be a significant factor in predicting the CAR, with the slope having a 7.98% p-value. Ultimately, mandated disclosures are concluded to not impact Swedish small cap securities, contradicting previous research that short selling has a greater impact on smaller firms. The conclusion drawn is that the news value is low, and therefore is not relevant enough to drive price change or trading activity.

Yes / This study uses short selling activity to test whether the relation between fundamentals and future returns is due to rational pricing or mispricing. We find that short sellers target firms with fundamental performance below market expectations. We also show that short selling activity reduces the return predictability of fundamentals by speeding up the price adjustments to negative fundamental signals. To further investigate whether the returns earned by short sellers reflect rational risk premia or mispricing, we exploit a natural experiment, namely Regulation of SHO, which creates exogenous shocks to short selling by temporarily relaxing short-sale constraints. Evidence from the experiment confirms that the superior returns to short sellers result from exploiting overpricing. Overall, our study suggests that the return predictability of fundamentals reflects mispricing rather than rational risk premia.

<p>  </p> <p>In the first chapter, we developed a dynamic equilibrium model of multiple stocks with extrapolators under the framework of Barberis, Greenwood, Jin, and Shleifer (2015a). Our model builds on the fact that extrapolative investors assign different relative weights of recent versus distant past return when forming their beliefs. We find that stock price increases in its own past performance measure, and is additionally associated with the past performance measure of the other stock if their dividends are correlated. The stock with higher relative weight have higher stock price, higher stock volatility, and lower risk premium. Both the own stock’s and the other stock’s past performance measure negatively predicts future stock price changes. </p> <p><br></p> <p>The second chapter includes Adem Atmaz, Stefano Cassella, and Huseyin Gulen as co-authors. In this chapter, we document considerable cross-sectional variation in survey expectations about aggregate stock market returns. While most investors are extrapolators who expect higher returns after a good market performance, some are contrarians who expect lower returns after a good performance. More notably, compared to extrapolators, contrarians have less persistent expectations that are corrected more quickly. Accordingly, we develop a dynamic equilibrium model accounting for these differences in expectations and find that the equilibrium stock price exhibits short-term momentum and long-term reversal as in the data. Furthermore, we test the key predictions of the model linking the shortterm momentum to observable differences between extrapolators and contrarians and find supportive evidence for our mechanism. </p> <p><br></p> <p>The third chapter includes Adem Atmaz and Suleyman Basak as co-authors. In this chapter, we develop a dynamic model of costly stock short-selling and lending market and obtain implications simultaneously supporting many empirical regularities. In our model, investors’ belief disagreement leads to lenders and short-sellers, who pay shorting fees to borrow stocks from lenders. Our main novel results are as follows. Short interest predicts future stock returns negatively and has a stronger predictive power than the corresponding dividend-price ratio. Higher short-selling risk can be associated with lower stock returns and less short-selling activity. Stock volatility is increased under costly short-selling. An application to the GameStop episode yields implications consistent with observed patterns. </p>

The Best PhD Thesis in the Faculties of Architecture, Arts, Business & Economics, Education, Law and Social Sciences (University of Hong Kong), Li Ka Shing Prize, 2005-2006. / published_or_final_version / abstract / Business / Doctoral / Doctor of Philosophy

<p><p>The recent SEC ban on short selling has presented an unrivaled opportunity to explore the effects of short selling constraints on crashes, market efficiency, and volatility. In this paper I carry out two groups of empirical tests on the individual banned stocks and a series of portfolios created from them: the first tests the hypothesis that short sale constraints increase the frequency and magnitude of crashes, by testing Hong & Stein’s (2003) model of market crashes. The second tests the hypothesis that short sale constraints reduce market efficiency, by testing Miller’s (1977) model in which stocks that are hard (or impossible) to short tend to exhibit overpricing. In regards to the first group of tests, the results are ambiguous: the frequency and magnitude of crashes increased during the ban period, while the skewness of the returns distribution of the portfolios became more negative, as expected, but these changes hold for the market as a whole, as well. On the other hand, the skewness of the returns distribution of the individual banned stocks became more positive. The second group of tests provides ample support for Miller’s model, as the results coincide with the models predictions: banning short selling leads to positive abnormal returns (overpricing) in the affected stocks. The ban is also related with a decrease in volatility relative to the market, an important result from a policy perspective.</p></p>

It is widely accepted in the literature that high lending fees predict negative returns because high fees capture the negative information from short sellers, on the demand side. Traditionally, the supply side is seen as passive, in which stock lenders act as price takers. Recent studies, however, have shown that this passivity of lenders no longer perpetuates. Faced with this discussion, the present study analyze the Brazilian stock loan market and disentangles the shorting demand and shorting supply curve shifts in order to understand the driving mechanism linking the supply side and stock returns. We also link the shorting supply curve with new announcements and verify how lenders react to a new information in the market. Our results indicate that lenders decrease the loan supply when they predict negative future returns and that they use new information to change supply conditions, indicating that lenders are not price takers / É amplamente aceito na literatura que altas taxas de empréstimo de ações preveem retornos negativos, uma vez que altas taxas capturam as informações negativas de vendedores a descoberto, do lado da demanda. Tradicionalmente, o lado da oferta é visto como passivo, no qual os credores das ações agem como tomadores de preços. Estudos recentes, entretanto, mostram que essa passividade dos emprestadores não mais se perpetua. Diante dessa discussão, o presente estudo analisa o mercado de crédito acionário brasileiro e separa a curva de demanda da curva de oferta por short para entender o mecanismo de condução que liga o lado da oferta aos retornos acionários. Analisa-se, também, a relação da curva de oferta de short com novas informações e verifica-se como os credores reagem a uma nova informação no mercado. Nossos resultados indicam que os credores restringem a oferta de empréstimo de ações quando preveem retornos futuros negativos e que usam novas informações para alterar as condições de empréstimo, indicando que os credores não são tomadores de preço