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An Investigation of the Informational Role of Short Interest in the Nasdaq Market

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Author Info
Hemang Desai (Cox School of Business, Southern Methodist University,)
K. Ramesh (Analysis Group/Economics, Boston, MA,)
S. Ramu Thiagarajan (Mellon Capital Management, San Francisco, CA,)
Bala V. Balachandran (Northwestern University)
Abstract

This paper examines the relationship between the level of short interest and stock returns in the Nasdaq market from June 1988 through December 1994. We find that heavily shorted firms experience significant negative abnormal returns ranging from - 0.76 to - 1.13 percent per month after controlling for the market, size, book-to-market, and momentum factors. These negative returns increase with the level of short interest, indicating that a higher level of short interest is a stronger bearish signal. We find that heavily shorted firms are more likely to be delisted compared to their size, book-to-market, and momentum matched control firms. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 5 (October)
Pages: 2263-2287
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Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2263-2287

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  1. Bardong, Florian & Bartram, Söhnke M. & Yadav, Pradeep K., 2007. "Are Short-sellers Different?," MPRA Paper 13585, University Library of Munich, Germany, revised 16 Nov 2008. [Downloadable!]
  2. Jarrod Johnston & Jeff Madura & Joel Harper, 2005. "Interaction Between Short Selling and Potential Insider Selling in the IPO Aftermarket," Journal of Financial Services Research, Springer, vol. 27(3), pages 283-302, September. [Downloadable!] (restricted)
  3. Diether, Karl & Lee, Kuan Hui & Werner, Ingrid M., 2007. "It’s SHO Time! Short-Sale Price-Tests and Market Quality," Working Paper Series 2006-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  4. Saffi, Pedro & Sigurdson, Kari, 2008. "Price efficiency and short selling," IESE Research Papers D/748, IESE Business School. [Downloadable!]
  5. Diether, Karl B. & Lee, Kuan-Hui & Werner, Ingrid M., 2007. "Can Short-Sellers Predict Returns? Daily Evidence," Working Paper Series 2005-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  6. Gerlinde Fellner & Erik Theissen, 2006. "Short Sale Constraints, Divergence of Opinion and Asset Values: Evidence from the Laboratory," Labsi Experimental Economics Laboratory University of Siena 009, University of Siena. [Downloadable!]
  7. Louis Gagnon & Jonathan Witmer, 2009. "Short Changed? The Market's Reaction to the Short Sale Ban of 2008," Working Papers 09-23, Bank of Canada. [Downloadable!]
  8. Benjamas Jirasakuldech & Robert Campbell & John Knight, 2006. "Are There Rational Speculative Bubbles in REITs?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(2), pages 105-127, March. [Downloadable!] (restricted)
  9. Jiang, Danling, 2006. "Investor Overreaction, Cross-Sectional Dispersion of Firm Valuations, and Expected Stock Returns," Working Paper Series 2006-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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