Longs, Shorts, and the Cross-Section of Stock Returns

Sell‐side analyst recommendation revisions and hedge fund trading before and after regulation fair disclosure

“…Likewise, the predictive power of hedge funds' trades for those stocks that are heavily upgraded by analysts and heavily sold by hedge funds accompanied with a decrease in SIR is better (a monthly DGTW adjusted return of -0.36% with a tstatistic of -2.39) than those similar stocks accompanied with an increase in SIR (a monthly DGTW adjusted return of 0.05% with a t-statistic of 0.27) during the post-Reg FD period. We believe these results complement the findings of Drake, Rees, and Swanson (2011), who show that short interest is a strong predictor of future returns when it disagrees with analyst consensus recommendations, and Nezafat, Shen, Wang, and Wu (2019), who find that heavily shorted stocks that are heavily owned by hedge funds do not earn abnormal returns. Our findings indicate that when the change in hedge funds' long and short positions are opposite to each other, those who trade against the change in analysts' consensus recommendations are better in predicting the future stock returns, suggesting that analyst consensus recommendation is no longer useful in the post-Reg FD period.…”

Why Do Firms Disagree with Short Sellers? Managerial Myopia versus Private Information

“…Jiao, Massa, and Zhang (2016) study the intersection of short selling and hedge fund trading to disentangle "informed short demand" from hedging. Highly shorted stocks also associated with high hedge fund ownership fail to underperform (Nezafat, Shen, Wang, and Wu (2019)). Massa, Qian, Xu, and Zhang (2015) use manager-short seller agreement, not disagreement, to examine competition in trading on negative private information.…”