Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange

Aitken, Michael; Frino, Alex; McCorry, Michael S.; Swan, Peter L.

doi:10.1111/0022-1082.00088

Cited by 325 publications

(139 citation statements)

References 23 publications

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“…In their simple rational model, once short interest is announced stock prices should immediately adjust to take into account the negative information. For example, Aitken et al (1998) find that stock prices fall immediately in response to announced increases in short interest. Here, however, one is able to predict returns one month ahead using public information on shorting costs.…”

Section: Subsequent Returnsmentioning

confidence: 99%

Short-sale constraints and stock returns

Jones

Lamont

2002

Journal of Financial Economics

720

154

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Stocks can be overpriced when short-sale constraints bind. We study the costs of short-selling equities from 1926 to 1933, using the publicly observable market for borrowing stock. Some stocks are sometimes expensive to short, and it appears that stocks enter the borrowing market when shorting demand is high. We find that stocks that are expensive to short or which enter the borrowing market have high valuations and low subsequent returns, consistent with the overpricing hypothesis. Size-adjusted returns are 1% to 2% lower per month for new entrants, and despite high costs it is profitable to short them. JEL classification: G14

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Section: Subsequent Returnsmentioning

confidence: 99%

Short-sale constraints and stock returns

Jones

Lamont

2002

Journal of Financial Economics

720

154

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“…In equity markets, short sales correctly predict negative returns (Aitken, Frino, McCorry, and Swan 1998;Boehmer, Jones, and Zhang 2008;Diether, Lee, and Werner 2009;Cohen, Diether, and Malloy 2007), aid price discovery (Boehmer and Wu 2013), and exploit profitable opportunities provided by downgrade announcements (Christophe, Ferri, and Hsieh 2010). Short sellers do not anticipate news, but have superior ability to process news (Engelberg, Reed, and Ringgenberg 2012).…”

Section: The Short Selling Literaturementioning

confidence: 99%

Unconventional monetary policy and the behavior of shorts

McInish¹,

Neely²,

Planchon³

2017

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In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce longterm interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after FOMC announcements not fully anticipated in spot bond markets. Short interest in Treasury and agency securities declined prior to expansionary announcements, indicating shorts anticipated these surprises, and declined further after these announcements. The failure of shorts to reinstitute their positions after the last purchase announcement confirms that the Fed convinced sophisticated investors that interest rates would remain low. Unconventional monetary policy and long yields during QE1: Learning from the shorts

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“…A limited number of studies investigate short-selling using non-US data (e.g. Aitken et al, 1998, Biais et al, 1999, Poitras, 2002, Ackert and Athanassakos, 2005, Au et al, 2007, Loncarski et al, 2009. However, these studies do not involve an investigation into short covering, as considered in this paper.…”

Section: Datamentioning

confidence: 99%

Short-Sellers and Short Covering

Moles¹,

Clunie

Pyatigorskaya

2009

MFJ

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This study fills an important gap in the literature on loss realization aversion. It shows how a 'sophisticated' sub-set of investors, namely short-sellers, react to losses. Using daily data on stock lending, we estimate the average price at which short positions were initiated, thus permitting a study of short-sellers' responses to their own book losses. We find that shortsellers close their positions in response to losses and not simply in response to rising share prices. This is a key result and a distinction from findings in related research. We conclude that short-sellers do not exhibit an aversion to realizing losses, but instead accept their losses or 'mistakes' systematically. Stocks subject to short-covering in this manner do not subsequently under-perform the market, and so there is no evidence of an investment performance cost (other than transaction costs) associated with immediately covering short positions that fall to an accounting loss. As short-sellers are believed to play an important role in the setting of prices, the results of this study have implications for asset pricing and market efficiency. 3 IntroductionThere is no upper limit to the price at which a stock can trade. Consequently, there is no limit, in theory, to the amount of money that a short-seller can lose. This contrasts with the experience of long-only investors, where losses are limited to the amount of capital invested.Exposure to unlimited liability can have catastrophic consequences, including personal bankruptcy, and is thus an important consideration in risk management. In this paper, we use a relatively new commercial dataset to examine the response of short-sellers to losing positions. We find significant evidence that short-sellers cover their positions as losses grow.This is consistent with short-sellers' use of stop losses as a risk control mechanism. We relate our findings to the literature on loss realization aversion and the 'disposition effect', an observed regularity in many studies of investor behavior. Our evidence that short-sellers are not averse to realizing losses has important implications for asset pricing and market efficiency, providing a strong motivation for this research.The literature on behavioral finance describes a number of investor biases, or apparent divergences from rational behavior. Amongst these is the tendency for investors to hold on to their losing stocks too long and sell their winners too early. Shefrin and Statman (1985) call this the 'disposition effect'. They seek to explain it by combining 'prospect theory' (Kahneman and Tversky, 1979) with the notion of 'mental accounting' (Thaler, 1985).Prospect theory modifies expected utility theory in two ways. It suggests that individuals assess outcomes through the change they bring to their current situation (or other reference state) and not through their effect on overall wealth; and that utility functions are concave for gains and convex for losses (but steeper to attain overall risk aversion). Thus, losses (from a reference sta...

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Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange

Cited by 325 publications

References 23 publications

Short-sale constraints and stock returns

Short-sale constraints and stock returns

Unconventional monetary policy and the behavior of shorts

Short-Sellers and Short Covering

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