Short‐Selling Prior to Earnings Announcements

Christophe, Stephen E.; Ferri, Michael G.; Angel, James J.

doi:10.1111/j.1540-6261.2004.00681.x

Cited by 537 publications

(331 citation statements)

References 30 publications

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“…These combined results suggest that while short sellers are typically contrarian, some short sellers appear to trade in the direction the market moves indicating that short sellers become less sophisticated on these event days (Dennis and Strickland, 2002). Christophe, Ferri, and Angel (2004) show that pre-earnings announcement short selling relates inversely with post-earnings announcement returns and argue that short sellers are able to anticipate negative news events, such as unfavorable earnings announcements. Under this assertion, we test whether short sellers are able to anticipate these days with extreme market movements.…”

Section: Discussionmentioning

confidence: 86%

“…Research showing that short sellers are informed about future stock returns is robust (Diamond and Verrecchia, 1987;Senchack and Starks, 1993;Aitken et al, 1998;Desai et al, 2002;Christophe, Ferri, and Angel, 2004;and Boehmer, Jones, and Zhang, 2008). Diether, Lee, and Werner (2009) argue that informed investors are able to short stocks that become overvalued or out of line with their fundamental value while documenting the short sellers are contrarian in contemporaneous and past returns.…”

Section: Introductionmentioning

confidence: 99%

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Short Selling during Extreme Market Movements

Blau

Ness

et al. 2010

JOT

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This study examines short selling of NYSE stocks contained in the S&P 500 on days with extreme increases (up days) and extreme decreases (down days) in the index. While Diether, Lee, and Werner (2009) show that short sellers are generally contrarian in contemporaneous returns, we find that short selling increases on large down days and decreases on large up days suggesting that during extreme market movements, short sellers tend to follow the crowd. Further, our results indicate that short sellers do not anticipate down days indicating that these event days are largely unforeseen. When examining the return predictability of short sellers on event days, we observe that short sellers on up days are significantly better at predicting negative next-day returns than short sellers on down days indicating that contrarian short selling is more profitable than momentum short selling.

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Section: Discussionmentioning

confidence: 86%

Section: Introductionmentioning

confidence: 99%

Short Selling during Extreme Market Movements

Blau

Ness

et al. 2010

JOT

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show abstract

“…Ali, Durtschi, Lev, and Trombley (2004) examine institutional investors, broadly defined. Ke, Huddart, and Petroni (2003) follow trading by corporate insiders, and Christophe, Ferri, and Angel (2004) follow short sellers. Some differences with these papers include the fact that we stress the potential of this approach to address the joint hypothesis problem, and that we apply it to the study of individual mutual fund managers, a group of particular interest.…”

Section: Introductionmentioning

confidence: 99%

Can Mutual Fund Managers Pick Stocks? Evidence from their Trades Prior to Earnings Announcements

et al. 2005

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We measure the stock-picking skill of mutual fund managers based on the returns realized around the subsequent earnings announcements of the stocks that they hold and trade. Relative to standard methodologies, this approach exploits the most informative segments of the returns data and ameliorates the joint hypothesis problem inherent in tests of stock-picking skill. Consistent with skilled trading, we find that, on average, stocks that funds buy earn significantly higher returns at subsequent earnings announcements than stocks that they sell. According to our measures of skill, certain funds perform persistently better than others, and the best performers tend to have a growth objective, large size, high turnover, and use incentive fees to motivate managers. * We thank Marcin Kacperczyk, Andrew Metrick, Lasse Pedersen, Robert Stambaugh, and seminar participants and New York University and Yale University for helpful comments. We thank Christopher Blake and Russ Wermers for assistance with data. Baker gratefully acknowledges financial support from the Division of Research of the Harvard Business School. Can mutual fund managers pick stocks? Evidence from their trades prior to earnings announcements February 16, 2005 AbstractWe measure the stock-picking skill of mutual fund managers based on the returns realized around the subsequent earnings announcements of the stocks that they hold and trade. Relative to standard methodologies, this approach exploits the most informative segments of the returns data and ameliorates the joint hypothesis problem inherent in tests of stock-picking skill. Consistent with skilled trading, we find that, on average, stocks that funds buy earn significantly higher returns at subsequent earnings announcements than stocks that they sell. According to our measures of skill, certain funds perform persistently better than others, and the best performers tend to have a growth objective, large size, high turnover, and use incentive fees to motivate managers.

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“…In addition, given their private information, we would expect local investors' trading to be more predictive of the upcoming earnings announcement (Christophe, Ferri, and Angel 2004), and thus we expect that more information about the forthcoming earnings announcement will be incorporated into price during the pre-announcement window (as in Drake, Roulstone, and Thornock 2012). Overall, we expect that for firms with higher local bias in search, bid-ask spreads and trading volumes will be higher in the preannouncement window, and returns in the pre-announcement window will be more predictive of the upcoming earnings announcement.…”

Section: Announcementsmentioning

confidence: 99%

“…Local investors are more likely to anticipate the news in the coming announcement through their private information. Thus, if there is a higher 4 concentration of local investors, we would expect higher information asymmetry across investors and higher trading volumes before the earnings announcement due to preannouncement private information (e.g., following Copeland and Galai 1983, Easley and O'Hara 1992, Glosten and Milgrom 1985, Krinsky and Lee 1996, as well as preannouncement returns that anticipate the earnings news to a greater degree (e.g., Christophe, Ferri, and Angel 2004;Drake, Roulstone, and Thornock 2012). As with the event-window market response, we use four methods to analyze pre-announcement spreads, volume, and returns: cross-sectional analysis, propensity-score-matched pairs, an instrumental variable approach, and an analysis of changes.…”

Section: Introductionmentioning

confidence: 99%

Local Bias in Google Search and the Market Response around Earnings Announcements

Sabrina

Shanthikumar

2016

The Accounting Review

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We examine the impact of distance on Internet search, and the effect of the "local bias" in search on the stock market response around earnings announcements. We find significant local bias in search behavior. Motivated by theories explaining local bias, local information advantage and familiarity bias, we predict and find that firms with higher local bias in search experience higher bid-ask spreads, lower trading volumes, and lower earnings response coefficients at the time of earnings announcements, consistent with non-local investors relying more than locals on public information announcements. Consistent with local information advantage, we find that in the week prior to the announcement, firms with higher local bias have higher bid-ask spreads, higher trading volumes, and returns that are more predictive of the coming earnings surprise. Consistent with familiarity bias, firms with higher local bias in search experience stronger post-earnings-announcement drift. We use unique predictions, propensity score matching, and two-stage least squares to identify the effects of local bias separately from the effects of overall visibility. Overall, we show there is significant local bias in search, and that this local bias has a significant impact on the market response around earnings announcements.

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Short‐Selling Prior to Earnings Announcements

Cited by 537 publications

References 30 publications

Short Selling during Extreme Market Movements

Short Selling during Extreme Market Movements

Can Mutual Fund Managers Pick Stocks? Evidence from their Trades Prior to Earnings Announcements

Local Bias in Google Search and the Market Response around Earnings Announcements

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