Early Movers Advantage? Evidence from Short Selling during After‐Hours on Earnings Announcement Days

Abstract

We examine short sellers’ after‐hours trading (AHT) following quarterly earnings announcements released outside of the normal trading hours. Our innovation is to use the actual short trades immediately after the announcements. We find that on these earnings announcement days, there is significant shorting activity in AHT relative to shorting activity both during AHT on nonannouncements days and during regular trading sessions around announcements. Short sellers who trade after‐hours on announcement days earn an excess return of 0.82% and 1.40% during before‐market‐open (BMO) and after‐market‐close (AMC)sessions, respectively. The magnitude of these returns increases to 1.48 (3.92%) for BMO (AMC) earnings announcements with negative surprise. We find that the reactive short selling during AHT has information in predicting future returns. Short sellers’ trades have no predictive power if they wait for the market to open to trade during regular hours. In addition, we find that the weighted price contribution during AHT increases with an increase in after‐hours short selling. Overall, our results suggest that short sellers in AHT are informed. Our findings remain robust using alternative holding periods and after controlling for macroeconomic news announcements during BMO sessions.

Short-term Overreaction in American Depository Receipts

“…In fact, Alldredge et al (2012) conclude that the short-term trading strategies and informativeness of short-sellers are driven primarily by trading during regular market hours. In addition, Jain et al (2019) show that the short-sellers' after-hour trading following quarterly earnings announcements are informed. Finally, Raudys et al (2013) and Lou et al (2019) argue that during the after-hours period the market is thinly traded and prices are inefficient.…”

The price continuity, return and volatility spillover effects of regular and after-hours trading

“…Trading volumes are integral to liquidity and price influence, with regular sessions characterized by larger volumes and robust price discovery functions [12]. In contrast, after-hours trading exhibits limited liquidity but heightened information asymmetry, suggesting a preference for trend-following strategies in short-selling over contrarian approaches [13][14][15].…”