Frenzied buyers and sophisticated sellers: How short sellers trade individual investors’ most purchased stocks

Dominique Outlaw

Journal of Behavioral and Experimental Finance, 2023, vol. 39, issue C

Abstract: Prior literature describes individual investors as “dumb money” and finds that they are irrational, frenzied buyers who display herd-like trading behavior. Using a dataset of individuals’ transactions, I examine how short sellers, who are considered sophisticated investors, trade during these periods of intense buying by individual investors. I find that, after controlling for institutional ownership, short interest is significantly higher for stocks that are most purchased by individuals, including financial advisers’ purchases in their personal trading portfolio. The findings suggest that when short sellers are not constrained, short sellers and individual investors display different outlooks on stocks’ future performance.

Keywords: Individual investors; Retail investors; Financial advisers; Short selling (search for similar items in EconPapers)
JEL-codes: D12 D14 G11 G24 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:39:y:2023:i:c:s221463502300045x

DOI: 10.1016/j.jbef.2023.100831

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