Short Selling and the Price Discovery Process

We show that stock prices impound more information when short sellers are more active.

Author(s):

Ekkehart Boehmer

Lundquist College of Business, University of Oregon and Affiliate Professor, EDHEC Business School

Julie Wu

Department of Banking and Finance, Terry College of Business, University of Georgia, Athens

First, in a large panel of NYSE-listed stocks, high-frequency informational efficiency of prices improves with greater daily 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, we demonstrate that short sellers change their trading around extreme return events in a way that aids price discovery. These results are robust to various econometric methodologies and model specifications. Overall, our results highlight the important role that short sellers play in the price discovery process.
Pdf
Short Selling and the Price Discovery Process...
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Type: Working paper
Date: le 02/05/2011
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

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