Short‐Selling Prior to Earnings Announcements

TLDR

The study investigates short‑selling activity in the five days before earnings announcements for 913 Nasdaq‑listed firms. The study finds that abnormal pre‑announcement short‑selling is linked to post‑announcement returns, is more common in low book‑to‑market or low SUE stocks, reflects firm‑specific information, and suggests regulators should enhance short‑selling disclosures.

Abstract

ABSTRACT This paper examines short‐sales transactions in the five days prior to earnings announcements of 913 Nasdaq‐listed firms. The tests provide evidence of informed trading in pre‐announcement short‐selling because they reveal that abnormal short‐selling is significantly linked to post‐announcement stock returns. Also, the tests indicate that short‐sellers typically are more active in stocks with low book‐to‐market valuations or low SUEs. The levels of pre‐announcement short‐selling, however, mostly appear to reflect firm‐specific information rather than these fundamental financial characteristics. We believe that these results should encourage financial market regulators to consider providing more extensive and timely disclosures of short‐selling to investors.