Tuesday, February 19, 2013

New Paper: "Short interest, returns, and fundamentals"

A new paper (February 2013), "Short interest, returns, and fundamentals", by Ferhat Akbas, Ekkehart Boehmer, Bilal Erturk, and Sorin Sorescu. Findings:

  • "If short sellers are detectives who uncover future bad news, bad news should follow periods of heavy shorting. [...] In a given month, the most heavily shorted stocks have the most negative public news the following month. At the other extreme, the least shorted stocks have the most positive public news the following month. The relation between short interest and future news is almost monotonically decreasing..."
  • "[R]esidual institutional ownership ... measures the deviation of a firm’s institutional ownership from the average institutional ownership within its size decile, in any given quarter. [T]his result [short interest predicts negative news] is stronger when residual institutional ownership is low.
  • We show that short sellers correctly anticipate negative earnings surprises, bad public news, and downgrades in analyst earnings forecasts several months ahead. Their ability to predict future fundamental news events appears to be the dominant driver of their ability to predict future returns. Shorts seem to be particularly well informed about stocks with low levels of institutional ownership, which are presumably harder to short.
I think you could measure the smartness of investor groups and look at whether they are long or short a particular equity. Smartest groups: insiders, shortsellers, competent asset managers for whom the position is a big position. Dumb groups: retail, index funds, most long-only funds.

We know that institutional investors sell down their equity position as the bankruptcy date approaches, and the dumping is amplified once the bankruptcy petition is actually filed. During the pendency of the bankruptcy, retail investors own an average of 90% of the firms' common stock.

Another variable would be the rate of change of the constituent groups' holdings. Shortsellers adding, insiders doing nothing, retail buying? That's a classic implosion pattern.

Something else you never hear about: whether insiders own their companies' debt securities. Do the GMXR execs own the 2015 paper yielding 40%?

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