Does short-selling amplify price declines or align stocks with their fundamental values?

Date

2014

Authors

Curtis, Asher
Fargher, Neil

Journal Title

Journal ISSN

Volume Title

Publisher

Institute for Operations Research and the Management Sciences

Abstract

Critics of short selling argue that short sellers amplify price declines by targeting firms with falling prices in an unwarranted manner. Contrary to this viewpoint, we find that increases in short interest for firms following a price decline are associated with measures of overpricing based on financial statement analysis. Our results extend to short-selling activity following marketwide declines. We also find evidence consistent with the profitability of short selling following price declines being driven by valuation-based positions. Overall, our findings suggest short sellers primarily undertake valuation-based strategies following price declines and have implications for regulators. Limiting short selling following price declines is likely to impede efficient price discovery.

Description

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Citation

Source

Management Science

Type

Journal article

Book Title

Entity type

Access Statement

License Rights

DOI

10.1287/mnsc.2013.1872

Restricted until

2037-12-31