Can Short-Sellers Predict Returns? Daily Evidence

Abstract

We test whether short-sellers in U.S. stocks are able to predict future returns based on new SEC-mandated data for 2005. There is a tremendous amount of short-selling activity during the sample: short-sales represent 24 percent of NYSE and 31 percent of Nasdaq share volume. Short-sellers increase their trading following positive returns and they correctly predict future negative abnormal returns. These patterns are robust to controlling for voluntary liquidity provision and for opportunistic risk-bearing by short-sellers. The results are consistent with the hypothesis that short-sellers are trading on short-term overreaction in stock returns. A trading strategy based on daily short-selling activity generates significant positive returns during the sample period.