Abstract
- Do short sales of a stock indicate that the stock will under-perform in the future? This topic has been examined over the decades with no single telling conclusion. In the midst of a rising overall market, with the uncovered short-seller exposed to unlimited potential losses and constrained by rules not encumbering the stock purchaser, the importance of short sales and short-interest data is highlighted. We examine Nasdaq stocks with large short interests. We argue that high short interest conveys negative information about stock price performance. The short seller of the highly-shorted stock delivers a credible negative opinion, ceteris paribus, on the stock being shorted. Our premise suggests that high short-selling activity is a precursor, on average, to subsequent stock price under-performance. We find, after allowance for both firm size and transactions costs, that Nasdaq stocks with high short positions significantly under-perform in the near and long term.