Does Short Selling Amplify Price Declines or Align Stocks with Their Fundamental Values?

Asher Curtis () and Neil L. Fargher ()
Additional contact information
Asher Curtis: Michael G. Foster School of Business, University of Washington, Seattle, Washington 98195
Neil L. Fargher: College of Business and Economics, Australian National University, Canberra, Australian Capital Territory 0200, Australia

Management Science, 2014, vol. 60, issue 9, 2324-2340

Abstract: Critics of short selling argue that short sellers amplify price declines by targeting firms with falling prices in an unwarranted manner. Contrary to this viewpoint, we find that increases in short interest for firms following a price decline are associated with measures of overpricing based on financial statement analysis. Our results extend to short-selling activity following marketwide declines. We also find evidence consistent with the profitability of short selling following price declines being driven by valuation-based positions. Overall, our findings suggest short sellers primarily undertake valuation-based strategies following price declines and have implications for regulators. Limiting short selling following price declines is likely to impede efficient price discovery. This paper was accepted by Mary Barth, accounting .

Keywords: short selling; price declines; fundamental analysis; market regulation (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2013.1872 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:60:y:2014:i:9:p:2324-2340

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().