Recent research into short selling

Highlights from academic papers published in 2023

In “Information Leakage from Short Sellers,” Fernando Chague and two co-authors find that when short sellers borrow shares to short, the brokers who arrange for the loan of shares in the securities lending market often pass this information to their favored clients so they can dispose of their shares before the short seller places his trade.  The findings were based on data from the Brazilian stock market.

Jap Efendi and three co-authors recently published a paper titled, “Ethical Challenges Regarding Earnings Management, Short Sellers, and Real Activities Manipulation.” They discovered that heavily shorted firms do less real activity management (RM), which is a term that describes management’s attempts to burnish quarterly earnings though the timing of investment or financing decisions. “This is consistent with the notion that short selling plays an external disciplinary role in constraining firms’ RM behavior for earnings management.”

In “Short interest and the stock market relation with news sentiment from traditional and social media sources,” Professor L.A. Smales and co-authors use computational linguistics methods to quantify sentiment scores from traditional and social media sources and find that significant bearish sentiment from these media sources (e.g. Twitter)  foreshadow declines in highly shorted S&P 500 stocks from 2016 to 2020, especially in the case of small companies.

In their study, “Common short selling and excess co-movement: Evidence from a sample of LSE stocks,” Marco Valerio Geraci and co-authors use data bases on short seller sales in the U.K. to establish that stocks shorted by common short sellers tend to have similar co-movements. This means investors can diversify their portfolios better if they avoid holding too many stocks that are shorted by the same short sellers. This mainly applies to European investors, which have the data bases on short sales to permit analysis of the composition of short sellers in individual stocks.   

(Work in progress - more updates to come)