Market Responses to Short Interest Announcements - Does the Market Always Get it Right?

Abstract: We investigate the market reaction to short interest announcements and quantify the informativeness of short sellers using a comprehensive sample of OMX Stockholm firms from November 2012 to January 2014. Our primary aim with this paper is to understand whether the market reactions are rational. Public announcements of short interest in nonoptioned stocks result in average cumulative abnormal returns (ACARs) of -5.34% (-3.59%) after 15 (30) trading days whilst public announcements of short interest in optioned stocks yield ACARs of 0.31% (1.27%) after 15 (30) trading days. Short interest announcements of nonoptioned stocks are strong bearish signals whilst short interest announcements of optioned stocks are bullish signals. Furthermore, we find that short sellers in nonoptioned stocks are well informed market participants as heavily shorted nonoptioned stocks underperform lightly shorted nonoptioned stocks by a risk adjusted average of 0.52% (0.32%) over the following 10 (20) trading days. Although only nonoptioned shorts are informative, the market fails to realize this. Therefore, there is an overreaction to the announcement of optioned shorts implying irrational market expectations.