The Trend in Short Selling and the Cross Section of Stock Returns

Zhaobo Zhu (), Xinrui Duan () and Jun Tu ()
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Zhaobo Zhu: Shenzhen Audencia Business School, Shenzhen University
Xinrui Duan: Shenzhen Audencia Business School, Shenzhen University
Jun Tu: Lee Kong Chian School of Business, Singapore Management University

Annals of Economics and Finance, 2019, vol. 20, issue 2, 565-586

Abstract: This paper documents that stocks with a decreasing (increasing) trend in their short selling as proxied by the long-term change in short interest experience significant and positive (negative) abnormal returns. Moreover, the positive abnormal returns have larger absolute values and are more persistent. The return predictability of the trend in short selling is not subsumed by the level of short interest and other well-known determinants of stock returns. Investor sentiment does not affect the profitability of the trend strategy. Our results suggest that market participants underreact to public information on short interest and that short sellers are sophisticated investors.

Keywords: Short selling; Short interest; Underreaction; Short-Sale constraints (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2019
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