Why Do Firms Disagree with Short Sellers? Managerial Myopia versus Private Information

Leonce Bargeron and Alice Bonaime

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 8, 2431-2465

Abstract: Though short sellers on average succeed at identifying overvalued equity, firms often signal disagreement with short sellers by repurchasing stock when short interest increases. We investigate whether this disagreement reflects a myopic defense of inflated prices, or positive private information. These repurchases appear motivated by managers’ private information, not agency issues, even when managerial benefits to short-termism are enhanced or monitoring is weaker. Managers’ informational advantage relates to subsequent news, earnings, and risk, but is attenuated if activists target management or insiders sell. A trading strategy based on our findings earns 7.5% annually.

Date: 2020
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