Investor Sentiment and Shorted-Stock Return

Yumi Park and Sangwon Suh
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Yumi Park: Korea Investment Corporation and Chung-Ang University, South Korea

Journal of Economic Development, 2023, vol. 48, issue 4, 61-91

Abstract: This study examines the role of firm-specific sentiment in the returns on shorted stocks in the Korean stock market. We find evidence that a low or high firm-specific sentiment predicts relatively lower shorted stock returns, whereas a mild sentiment does not. As the sentiment effect on stock returns is stronger in extreme sentiment than mild sentiment, this evidence supports the hypothesis that short sellers are skilled in analyzing firm-specific sentiment. The effect of sentiment on shorted stock returns is pronounced for stocks with a high return volatility, low profitability, high price-to-earnings ratio, high momentum, and a low book-to-market ratio. In contrast, margin traders are not skilled at analyzing firm-specific sentiment, and short sellers possess superior skills compared to margin traders.

Keywords: Short Selling; Margin Trading; Firm-Specific Investor Sentiment; Korean Stock Market (search for similar items in EconPapers)
JEL-codes: G11 G14 G41 (search for similar items in EconPapers)
Date: 2023
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