Are Short Sellers Informed? Evidence from the 2007–2008 Subprime Mortgage Crisis

Abstract

This paper examines the short selling activities around financial firms' announcements of asset write-downs during the 2007-2008 subprime mortgage crisis. We find that short sellers accumulate short positions prior to write-down announcements, and that stocks experience significantly negative returns around such announcements. These results suggest that the return predictability of short interests is due to short sellers' informational advantage. Furthermore, we show that short sellers increase their positions significantly in the announcement month and keep increasing their positions afterward, suggesting the feedback effect of the disclosed write-downs on financial firms' existing exposures. The valuable information contained in the * short interest should encourage regulators to mandate stock exchanges disclose short selling activities more frequently.

Can Short Sellers Detect Internal Control Material Weaknesses? Evidence From Section 404 of the Sarbanes–Oxley Act

“…Because we are interested in examining whether short interest increases for ICMW firms prior to the triggering event, similar to Desai et al (2006), Karpoff and Lou (2010), and Liu et al (2012), we also calculate the changes in short interest, DSI, and in abnormal short interest, DABSI, from 18 months to 1 month before the event date. We measure the short interest up to month 21 because short-selling data are reported only in terms of settlement on the 15th of each month (or the prior trading day if the 15th is not a trading day), and Month 0's measure may fall within the time period after the triggering event.…”

“…Studies further examine the information set of short sellers. They show that short sellers are able to anticipate certain negative corporate events, such as restatements and accounting fraud (Dechow, Sloan, & Sweeney, 1996;Desai, Krishnamurthy, & Venkataraman, 2006;Karpoff & Lou, 2010), negative earnings surprises (Christophe et al, 2004), and asset write-downs (Liu, Ma, & Zhang, 2012). One common aspect of all these studies is the focus on events with immediate adverse effects on earnings.…”

Short‐sale constraints and securities lending by exchange‐traded funds

“…First introduced by Rosenbaum and Rubin (1983), the propensity score matching approach is widely used in the financial economics research (Armstrong et al , 2010; Agrawal and Nasser, 2012). In a recent study, Liu et al (2012) use this method to control for endogeneity bias in their study on whether short‐sellers are informed as evidenced by their actions during the subprime crisis. We follow the procedure described in Liu et al (2012) in implementing the propensity score matching method.…”

“…In a recent study, Liu et al (2012) use this method to control for endogeneity bias in their study on whether short‐sellers are informed as evidenced by their actions during the subprime crisis. We follow the procedure described in Liu et al (2012) in implementing the propensity score matching method.…”