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Informed or speculative: Short selling analyst recommendations

Benjamin Blau () and Chip Wade

Journal of Banking & Finance, 2012, vol. 36, issue 1, 14-25

Abstract: Christophe et al. (2010) find evidence of abnormal short activity prior to analyst downgrades and argue that short sellers may be violating SEC insider-trading laws by trading on information obtained from analysts about upcoming downgrades. However, observing abnormal shorting prior to downgrades is not tantamount to determining that short sellers are trading on tips from analysts unless shorting is abnormally low prior to upgrades. This paper revisits this issue. While we observe abnormal shorting prior to downgrades, we also find markedly higher shorting prior to upgrades. In fact, the short-selling patterns surrounding both downgrades and upgrades are remarkably symmetric indicating that short sellers during the pre-recommendation period are not unusually informed about the direction of upcoming recommendation changes. If anything, our findings indicate that short selling prior to analyst recommendations is more likely speculative than informed.

Keywords: Short selling; Informed trading; Analyst recommendations; Tipping (search for similar items in EconPapers)
JEL-codes: G12 G14 G19 (search for similar items in EconPapers)
Date: 2012
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