Short sales, institutional investors and the cross-section of stock returns

Nagel, Stefan

doi:10.1016/j.jfineco.2004.08.008

Cited by 1,066 publications

(549 citation statements)

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“…For example, Zhang (2006) finds that price momentum decreases in analyst coverage and argues that stocks followed by fewer analysts are more likely to be mispriced due to greater information asymmetry. In addition, Nagel (2005) finds that the value premium is decreasing in institutional ownership and attributes this to the fact that short selling is harder for stocks with low institutional ownership since individual investors are less likely to lend out their shares.…”

Section: Variation With Firm Characteristicsmentioning

confidence: 99%

Customer-Base Concentration: Implications for Firm Performance and Capital Markets

Patatoukas

2011

The Accounting Review

529

425

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In this paper, I examine whether and how customer-base concentration affects supplier firm performance and stock market valuation. To this end, I compile a comprehensive sample of supply chain relationships and introduce a measure, labeled CC, to capture the extent to which a supplier"s customer base is concentrated. In contrast to the conventional view of customer-base concentration as an impediment to firm profitability, I document a positive contemporaneous association between CC and accounting rates of return, which suggests that efficiencies accrue to suppliers with concentrated customer bases. Consistent with a cause-and-effect link between customer-base concentration and firm performance, analysis of intertemporal changes demonstrates that CC increases predict efficiency gains in the form of reduced operating expenses per dollar of sales and enhanced asset utilization. Using stock returns tests, however, Ifind that investors systematically underreact to the implications of changes in customer-base concentration for future firm fundamentals when setting stock prices. Over the thirty-year sample period studied, a zero-investment trading strategy that exploits investors" underreaction yields abnormal returns in the region of 10 percent per year.

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Section: Variation With Firm Characteristicsmentioning

confidence: 99%

Customer-Base Concentration: Implications for Firm Performance and Capital Markets

Patatoukas

2011

The Accounting Review

529

425

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“…For instance, the larger, more prominent stocks tend to be more visible. Nagel (2005) also suggests that stocks in the S&P 500 index are more likely to be held by passive investors and are hence likely to face lower short-selling constraints. We adjust for these aspects by calculating abnormal order imbalances.…”

Section: Imbalance and Return Datamentioning

confidence: 99%

Book/Market Fluctuations, Trading Activity, and the Cross‐section of Expected Stock Returns

Anand

Subrahmanyam

2009

Review of Behavioural Finance

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, and seminar participants at UCLA and Indiana University, for valuable comments. AbstractBook/Market Fluctuations, Trading Activity, and the Cross-Section of Expected Stock ReturnsWe analyze trading activity accompanying equities' switches from "growth" (low book-to-market ratios) to "value" (high book-to-market ratios), and vice versa. We find that a large book/market ratio increase, i.e., a shift from growth to value, is accompanied by a strongly negative small order imbalance. Large order imbalance exhibits weaker patterns across stocks that experience large changes in book/market. The evidence indicates that growth-to-value shifts are more strongly related to small traders than large ones. The interaction of book/market ratios with order flows plays a crucial role in return predictability. Specifically, the predictive ability of book/market ratios for future returns is significantly enhanced for those stocks that have experienced book/market increases as well as high levels of net selling by way of small orders. 1 IntroductionThe notion that the cross-section of stock returns can be driven by behavioral considerations has taken increased impetus in recent years. While early empirical studies by Black, Jensen, and Scholes (1972) and Fama and MacBeth (1973) suggest a significant positive cross-sectional relation between security betas and expected returns, supporting the capital asset pricing model (Sharpe (1964), Lintner (1965), and Mossin (1966), more recently, Fama and French (1992) find that the relation between return and market beta is insignificant. 1This calls into question the empirical importance of links between risk and expected returns.On the importance of characteristics other than those directly related to risk-return models, the body of evidence is quite substantive. The landmark study by Fama and French (1992) finds that size and the book/market ratio strongly predict future returns (returns are negatively related to size and positively to book/market). Fama and French (1993) provide evidence that a three-factor model based on factors formed on the size and book-market characteristics explains average returns, and argue that the characteristics compensate for distress risk. But argue that, after controlling for size and book/market ratios, returns are not strongly related to betas calculated based on the Fama and French (1993) factors 1 Internationally, Rouwenhorst (1999) finds no significant relation between average return and beta with respect to the local market index. Tests of the consumption-based capital asset pricing model (Breeden (1979)) have also led to inconclusive results; see, for example, Hansen and Singleton (1983). Jagannathan and Wang (1996) find a modest positive relation between conditional beta and expected returns when the market is expanded to include human capital.2 (see, however, Davis, Fama, and French (2000) for a contrary view). 2More recently, Daniel and Titman (2006) argue that the book/market effect is driven by overreaction to that part of the book/market rati...

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“…There is a large amount of prior research that look at the high correlations between short sales and asset returns; for example Chen et al (2002), Nagel (2005), D'Avolio (2002), Cohen et al (2007), Jones and Lamont (2002), and Asquith et al (2005) are studies that were focused on empirically testing the high correlation of short sales and stock returns. Accordingly, based on prior studies, other papers also discussed the shorting activities from either the short supply or demand side perspective.…”

Section: Introductionmentioning

confidence: 99%

“…Chen et al (2002) use the breadth of stock holdings of mutual funds to test this constraint. Nagel (2005) applied the condition of institutional holdings, and D'Avolio (2002), Cohen et al (2007), and Jones and Lamont (2002) used cost of short sales markets to examine the relationship between the supply side of proxy variables and stock price. The second constraint is the actual cost of short selling; short selling involves several indirect costs such as interest payments on stocks being borrowed.…”

Section: Introductionmentioning

confidence: 99%

The Strategic Responses from Sophisticated Investors to Inaccurate Forecast of Financial Analysts

Lee¹,

Powell²,

Nguyen³

et al. 2018

AFR

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We examine whether there are more information based trading activities that are generated around the time of earnings announcements. We distinguish between the influence of information based traders, especially short sellers, and market information quality through the reaction of participants to new information derived from corporate earnings announcements. We find that informed traders do take advantage of overpriced stocks, and do short stocks before the confirmation of past expectations of future cash flows from corporates. We apply Standardized Unexpected Earnings (SUE) in the method and our result indicates that informed traders are more likely to take advantage of overpriced stocks, using a tool (shorting) that is not traditionally used by unsophisticated investors. We also demonstrate an unique finding that informed traders follow stock analysts not for investing advice, but to take advantage of those unsophisticated investors that buy in to the rhetoric expressed by financial analysts.

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Short sales, institutional investors and the cross-section of stock returns

Cited by 1,066 publications

References 45 publications

Customer-Base Concentration: Implications for Firm Performance and Capital Markets

Customer-Base Concentration: Implications for Firm Performance and Capital Markets

Book/Market Fluctuations, Trading Activity, and the Cross‐section of Expected Stock Returns

The Strategic Responses from Sophisticated Investors to Inaccurate Forecast of Financial Analysts

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