How are Shorts Informed? Short Sellers, News, and Information Processing
We combine a database of short sellers’ trading patterns with a database of news releases to show that short sellers’ trading advantage comes largely from their ability to analyze publicly available information. Specifically, the venerable finding that short sellers’ trades predict future negative returns (e.g., Boehmer, Jones, and Zhang (2008) and Asquith, Pathak and Ritter (2005)) is more than twice as strong in the presence of news stories. We show that the most profitable short sales are not from market makers, but from clients, and we show that these client short sales are particularly profitable in the presence of news. Furthermore, we show that the ratio of short sales to total volume is nearly constant through news periods, and when we do find differences between the timing of short sellers’ trades and the overall market, we find that relative to other types of trading there is a significant increase in short selling after news stories. We find that short sellers’ ability to predict returns is concentrated in many of the news categories in which short sellers trade relatively late; a finding consistent with the idea that short sellers’ advantage arises from their ability to process publicly available information.