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Frenzied buyers and sophisticated sellers: How short sellers trade individual investors’ most purchased stocks

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  • Outlaw, Dominique

Abstract

Prior literature describes individual investors as “dumb money” and finds that they are irrational, frenzied buyers who display herd-like trading behavior. Using a dataset of individuals’ transactions, I examine how short sellers, who are considered sophisticated investors, trade during these periods of intense buying by individual investors. I find that, after controlling for institutional ownership, short interest is significantly higher for stocks that are most purchased by individuals, including financial advisers’ purchases in their personal trading portfolio. The findings suggest that when short sellers are not constrained, short sellers and individual investors display different outlooks on stocks’ future performance.

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  • Outlaw, Dominique, 2023. "Frenzied buyers and sophisticated sellers: How short sellers trade individual investors’ most purchased stocks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:beexfi:v:39:y:2023:i:c:s221463502300045x
    DOI: 10.1016/j.jbef.2023.100831
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    More about this item

    Keywords

    Individual investors; Retail investors; Financial advisers; Short selling;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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