2008 Headlines
Looking for your next stock pick? Watch what institutions are shorting.
Cornell study examines effectiveness of short selling across types of sellers including individuals, institutions and proprietary accounts
April 21, 2008 | Ithaca, NY | Shorting stocks once thought to be the work of high-risk traders is becoming more common practice with large and small firms on Wall Street. While it's often been thought that short-sellers help to keep the market in line by acting on fundamental value shifts in advance of others, little research has been conducted to determine whether short sellers actually know what they are doing.
For the first time, research conducted by Xiaoyan Zhang of Cornell University's Johnson School, Ekkehart Boehmer of Texas A&M's Mays Business School, and Charles M. Jones of Columbia University's Graduate Business School concludes that heavy short sellers have in fact identified and acted on important value-relevant information that has not yet been impounded into prices, according to the paper "Which Shorts Are Informed?" published in the Journal of Finance, April, 2008
The authors use data from all short sales orders submitted to the New York Stock Exchange from 2000 to 2004. They found that shorting accounts for more than 12.9 percent of NYSE volume, suggesting that shorting constraints are easily surmounted for even the smallest-cap NYSE stocks. They also identify the type of trader initiating the short to find out which types of traders outperform others.
According to the study, heavily shorted stocks underperform lightly shorted stocks by a risk-adjusted average of 15.6% annually, indicating that short sellers as a whole tend to possess private information about equity values and do act to help correct market inefficiencies. When looking at the various account types, including individuals, institutions, and NYSE proprietary accounts, the researchers found that institutions are the most successful short-sellers, with stocks heavily shorted by institutions underperforming the market by 19.6% on an annual basis.
"Institutional short sellers have identified and acted on important value-relevant information that has not yet been impounded into prices," Zhang said. "The price effects are permanent, which suggests that short sellers are not manipulating or otherwise temporarily depressing the share price. The results are strongly consistent with the emerging consensus in financial economics that short sellers possess important information, and that their trades are important contributors to more efficient stock prices."
Contact:
Deirdre Snyder, dgs37@cornell.edu or 607-255-3494
