Market Efficiency, Short Sales And Announcement Effects

Zheng, Lin. 2009. Market Efficiency, Short Sales And Announcement Effects. Doctoral Dissertation, Cornell University.

In this dissertation I aim at improving the understanding of the informativeness of short-selling in the context of the motivation, the impact on future stock returns, and the relation with market efficiencies. In Chapter 1, I study short sellers? reactions after quarterly earnings announcements as well as the associations between short sales and post announcement stock returns. Short sales increase immediately after both negative and positive earnings surprises. After positive earnings surprises, short sellers appear to act as contrarians, and trade against stock price overreaction, thereby inducing price reversal in the long run. After negative earnings surprises, short sellers act as momentum traders, and trade with post earnings announcement drift. However, they are not able to fully arbitrage away the downside post earnings announcement drift. The short sellers? different reactions at subsequent surprises in a series of same-sign earnings surprises implies that short sellers exploit the consequences of other investors? behavioral biases. The results highlight the motivations and impacts for short sales after earnings announcements. In Chapter 2, I investigate the informativeness of short-selling by combining Probability of Information-based Trading measure and short sales transaction data. Short sales depress stock returns in the short run, regardless of the information asymmetry level. However, short sales can not predict future stock return in the long run if information asymmetry levels are low. Large size short sales are the most informed. When short sales constraints are more binding, short-selling is more informed, especially for the stocks with high information asymmetry levels. In Chapter 3, I examine short sales prior to merger and acquisition announcements for acquiring firms. Short-selling increases prior to stock-financed not cash-financed mergers and acquisitions. Pre-announcement abnormal short-selling is negatively related to post-announcement stock returns. Short sellers are informed of the method of payment, but not the outcome. The results also indicate that short-sellers are more active in stocks with larger firm size, lower book-to-market ratio, and higher liquidity.

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