Publication Type

Journal Article

Publication Date

2-2013

Abstract

We show that stock prices are more accurate when short sellers are more active. First, in a large panel of NYSE-listed stocks, intraday informational efficiency of prices improves with greater shorting flow. Second, at monthly and annual horizons, more shorting flow accelerates the incorporation of public information into prices. Third, greater shorting flow reduces post-earnings-announcement drift for negative earnings surprises. Fourth, short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values. These results are robust to various econometric specifications, and their magnitude is economically meaningful.

Keywords

Informational efficiency of prices, Price discovery, Short selling

Discipline

Business | Portfolio and Security Analysis

Research Areas

Finance

Publication

Review of Financial Studies

Volume

26

Issue

2

First Page

287

Last Page

322

ISSN

0893-9454

Identifier

10.1093/rfs/hhs097

Publisher

Oxford University Press

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1093/rfs/hhs097

Comments

Runner up, RFS Best Paper Award 2014.

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