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Article
Publication date: 13 July 2018

Sean M. Davis, Jeffrey M. Coy and Fernando Guillen Solis

High short interest is associated with overvaluation, and the purpose of this paper is to find contradictions to the commonly held “overvaluation hypothesis” when merger…

Abstract

Purpose

High short interest is associated with overvaluation, and the purpose of this paper is to find contradictions to the commonly held “overvaluation hypothesis” when merger and acquisition (M&A) targets are examined. This paper extends the work of Ben-David et al. (2015), who confirm high short interest indicates overvaluation when focused on acquiring firms.

Design/methodology/approach

Short interest is examined as a predictor of acquisition likelihood using longitudinal data for US firms from 2003 to 2013. How short interest impacts the premiums paid by acquiring firms is examined with target, acquirer and deal characteristics.

Findings

M&A targets have high short interest and short interest increases acquisition likelihood, suggesting undervaluation. Highly shorted firms also experience outsized reductions in share price prior to merger announcements, and the premiums paid are also significantly predicted by short interest levels.

Research limitations/implications

Short selling activity can be motivated for reasons other than overvaluation, and many short positions can be held for long periods before they are closed, leading to high short interest levels for extended periods. Therefore, investors and researchers are cautioned that high short interest levels may exist in stocks that have already declined in price and could be poised for a reversal.

Originality/value

This study adds to the growing body of work indicating that short interest might not be the signal of overvaluation most researchers accept it to be.

Details

Managerial Finance, vol. 44 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 22 June 2012

Benjamin Blau and Tyler J. Brough

The purpose of this paper is to investigate what is denoted as episodes of concentrated short‐selling activity, or consecutive days of abnormal short‐sale activity in a…

Abstract

Purpose

The purpose of this paper is to investigate what is denoted as episodes of concentrated short‐selling activity, or consecutive days of abnormal short‐sale activity in a particular stock. The motivation to do so is two fold. First, US regulators and regulators in other countries have restricted short selling in order to protect the integrity of markets. Second, there is some conflicting academic research determining whether short sellers are manipulative in nature.

Design/methodology/approach

After defining these episodes by concentrated short selling, the paper examines returns before and after to determine whether these episodes target struggling stocks and whether these episodes predict negative returns.

Findings

Contrary to the argument that episodes of concentrated shorting activity target struggling stocks, it is found that these episodes follow periods of positive returns. Further, it is found that abnormal volatility and high trading volume also predict the occurrence of these episodes. These results suggest that concentrated shorting occurs in stocks that are increasing in price during periods of heterogeneity among investors expectations (Berkman et al.). It is also found that short sellers during bear raids are able to predict when prices reverse as returns become negative the day after the last day of the raid. Combined, the results suggest that bear raids by short sellers are important for the efficiency of markets.

Originality/value

The results from this study have important regulatory implications as well as implications regarding the informational efficiency of stock prices.

Details

International Journal of Managerial Finance, vol. 8 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 6 August 2020

Mao He, Juncheng Huang and Hongquan Zhu

The purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve…

Abstract

Purpose

The purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the relationship between idiosyncratic volatility and investors' heterogeneous beliefs, and uncover the ability of heterogeneous beliefs, as well as to explain the “idiosyncratic volatility puzzle”, we construct our study as follows.

Design/methodology/approach

Our study adopts the unexpected trading volume as proxies of heterogeneity, the residual of Fama–French three-factor model as proxies of idiosyncratic volatility. Portfolio strategies and Fama–MacBeth regression are used to investigate the relationship between the two proxies and stock returns in Chinese A-share market.

Findings

Investors' heterogeneous beliefs, as an intermediary variable, are positively correlated with idiosyncratic volatility. Meanwhile, it could better demonstrate the negative correlation between the idiosyncratic volatility and future stock returns. It is one of the economic mechanisms linking idiosyncratic volatility to subsequent stock returns, which can account for 11.28% of the puzzle.

Originality/value

The findings indicate that idiosyncratic volatility is significantly and positively correlated with heterogeneous beliefs and that heterogeneous beliefs are effective intervening variables to explain the “idiosyncratic volatility puzzle”.

Details

China Finance Review International, vol. 11 no. 1
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 15 September 2020

Tingli Liu, Ying Jiang and Lizhong Hao

Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed…

Abstract

Purpose

Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed companies remains unclear. This paper aims to examine the impact of short-sale refinancing on earnings quality after the short-selling constraints have been released. The authors further explore whether this impact is subject to the nature of property rights and shareholding structures.

Design/methodology/approach

This study is based on a sample of A-share firms in China for the period 2014–2016. The authors use earnings response coefficients (ERC) as a proxy for earnings quality. To empirically examine this issue, a matching sample is generated by using propensity score matching method (PSM) to reduce sample selection bias.

Findings

This study provides evidence that deregulation of short selling has positive external effect on corporate governance. The results indicate that the potential short-selling opportunities can effectively suppress earnings manipulation and improve earnings quality. However, the impact of short selling on earnings quality varies for companies with different nature of property rights and shareholding structure.

Originality/value

To the best of the authors’ knowledge, this is the first study to investigate the relationship between short selling and earnings quality in the unique setting of short-sale refinancing. This study provides new evidence on the impact of short selling at the micro level and calls for further deregulation of short selling. In addition, this study contributes to existing studies on short-sale refinancing by examining an emerging market.

Details

International Journal of Accounting & Information Management, vol. 29 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 24 April 2019

Perrie Michael Weiner, Edward D. Totino and Aaron Goodman

To analyze the evolution of market manipulation and fraud by short-sellers and online bloggers and mechanisms available for addressing and remediating the damage caused by…

Abstract

Purpose

To analyze the evolution of market manipulation and fraud by short-sellers and online bloggers and mechanisms available for addressing and remediating the damage caused by such fraud, including recent activity by the US Securities and Exchange Commission (the “SEC” or “Commission”).

Design/methodology/approach

This article discusses the development of a modern market manipulation and fraud scheme – the “short and distort” – including a review of potential claims by the targeted companies and anticipated impediments to asserting such claims.It further examines the need for regulation and the possibility that the SEC has opened the door for civil claims for this type of fraud.

Findings

Companies wrongfully targeted by illegitimate short-sellers may pursue claims for securities violations, defamation, business interference, securities fraud and extortion, among other claims.However, each of these claims has had, and still has, both business and legal challenges, as the short-seller’s initial defense tends to be to attempt to prove the truth of their statements to the market or establish those statements as legitimate opinion.The SEC has made the pursuit easier but there is still a long way to go.

Originality/value

This article contains valuable information about recent SEC enforcement activity and practical guidance from experienced securities lawyers.

Details

Journal of Investment Compliance, vol. 20 no. 2
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 8 June 2020

Christopher von Koch and Magnus Willesson

The purpose of this paper is to review the literature that measures the concept of firms' information environment (IE) with focus on the validity of proxies used to measure IE.

Abstract

Purpose

The purpose of this paper is to review the literature that measures the concept of firms' information environment (IE) with focus on the validity of proxies used to measure IE.

Design/methodology/approach

The paper reviews the IE literature using theoretically based categories and analyzes the contextual meaning and use of IE proxies. The review is based on a selection of 284 research articles from 51 journals between 2000 and 2018. A total of 37 different proxy measures of IE are found and analyzed with respect to causality based on categories and the use of IE variables as dependent, independent and control variables.

Findings

The study indicates that the IE measures are heterogeneous and there is a lack of consensus regarding their use. The different conditions used to study IE explain part, but far from all, of this heterogeneity. Furthermore, we find that the use of IE measures is only briefly discussed or motivated among the studies in the sample. These findings suggest a necessary discussion about causality in the use of IE as dependent, independent or control variables.

Originality/value

This study contains new and significant information on IE and IE proxy measures. It provides an extensive literature review and provides a novel typology to analyze IE.

Details

Managerial Finance, vol. 46 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

Book part
Publication date: 15 November 2018

Savannah (Yuanyuan) Guo, Sabrina Chi and Kirsten A. Cook

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over…

Abstract

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms’ stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

Article
Publication date: 10 January 2018

George Gao, Qingzhong Ma and David Ng

The purpose of this paper is to empirically examine whether corporate insiders extract information from activity of outsiders, specifically the short sellers.

Abstract

Purpose

The purpose of this paper is to empirically examine whether corporate insiders extract information from activity of outsiders, specifically the short sellers.

Design/methodology/approach

Using portfolio approach and Fama-MacBeth regressions, this study examines the relation between short interest and subsequent insider trading activities.

Findings

The following results are reported. First, there is a strong inverse relation between short selling and subsequent insider trading, which is partially due to common private information and same target firm characteristics. Second, insiders extract information from shorts. This information extraction effect is more pronounced for firms whose insiders have stronger incentives to extract shorts information (insider purchases, higher short sale constraints, and better information environments). Third, during the September 2008 shorting ban, the information extraction affect disappeared among the large banned firms, whose shorting activities were distorted.

Research limitations/implications

The findings contradict the of-cited accusations corporate executives hold against short sellers. Instead, corporate insiders appear to trade in the same direction as suggested by shorting activities.

Practical implications

Among the vocal critics of short sellers are corporate insiders, who allege that short sellers beat down their stock prices. Many corporations even engage in stock repurchases to show confidence that the stock will perform well going forward despite the short sellers’ actions. This paper’s analysis on their personal portfolios suggests the other way around.

Originality/value

By focusing on how corporate insider trading is related to shorts information, this paper sheds new light on whether corporate decisions convey the true information the corporate insiders possess.

Details

China Finance Review International, vol. 8 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 8 July 2014

Naomi E. Boyd, Ann Marie Hibbert and Ivelina Pavlova

– The purpose of this paper is to examine the relationship between naked short selling and accounting irregularities that cause a firm to issue a restatement.

Abstract

Purpose

The purpose of this paper is to examine the relationship between naked short selling and accounting irregularities that cause a firm to issue a restatement.

Design/methodology/approach

Using the level of abnormal fails-to-deliver as a proxy for naked short selling, the paper looks for evidence of increased naked short selling in anticipation of, as well as in response to these announcements.

Findings

Larger firms and firms with a higher percentage of institutional ownership experience greater levels of fails prior to the announcement day, while smaller firms are more likely to be targets of naked short sellers after the announcement. The paper also finds that more transparent announcements are associated with more abnormal fails.

Originality/value

This paper is the first research to study the relation between naked short selling and accounting restatements.

Details

Managerial Finance, vol. 40 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 14 November 2016

Tony Chieh-Tse Hou, Phillip McKnight and Charlie Weir

The purpose of this paper is to investigate the role of earnings forecast revisions by equity analysts in predicting Canadian stock returns

Abstract

Purpose

The purpose of this paper is to investigate the role of earnings forecast revisions by equity analysts in predicting Canadian stock returns

Design/methodology/approach

The sample covers 420 Canadian firms over the period 1998-2009. It analyses investors’ reactions to 27,271 upward revisions and 32,005 downward revisions of analysts’ forecasts for Canadian quoted companies. To test whether analysts’ earnings forecast revisions affect stock return continuation, forecast revision portfolios similar to Jegadeesh and Titman (2001) are constructed. The paper analyses the returns gained from a trading strategy based on buying the strong upward revisions portfolio and short selling the strong downward revisions portfolio. It also separates the sample into upward and downward revisions.

Findings

The authors find that new information in the form of analyst forecast revisions is not impounded efficiently into stock prices. Significant returns persist for a trading strategy that buys stocks with recent upward revisions and short sells stocks with recent downward revisions. Good news is impounded into stock prices more slowly than bad news. Post-earnings forecast revisions drift is negatively related to analyst coverage. The effect is strongest for stocks with greatest number of upward revisions. The introduction of the better disclosure standards has made the Canadian stock market more efficient.

Originality/value

The paper adds to the limited evidence on the effect of analyst forecast revisions on the returns of Canadian stocks. It sheds light on the importance of analysts’ earnings forecast information and offers support for the investor conservatism and information diffusion hypotheses. It also shows how policy can improve market efficiency.

Details

Managerial Finance, vol. 42 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

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