Short selling and market mispricing

Short selling and market mispricing We provide evidence on short sellers’ exploitation of temporary mispricing in the equity market. Using a mispricing indicator that measures deviations from a stock’s fundamental value, we find higher levels of short selling for temporarily overvalued stocks. The result is robust to controlling for short sale constraints and illiquidity, and it is more pronounced when short sale constraints do not bind and stocks are illiquid. We also find that informed short sellers are able to distinguish temporary overpricing from upward return momentum. However, when fundamental news is released, short sellers focus on exploiting negative fundamental changes rather than temporary overpricing. Short sellers contribute to market quality by correcting overpricing quickly over time, but they do not destabilize the market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Short selling and market mispricing

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Publisher
Springer Journals
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-015-0521-5
Publisher site
See Article on Publisher Site

Abstract

We provide evidence on short sellers’ exploitation of temporary mispricing in the equity market. Using a mispricing indicator that measures deviations from a stock’s fundamental value, we find higher levels of short selling for temporarily overvalued stocks. The result is robust to controlling for short sale constraints and illiquidity, and it is more pronounced when short sale constraints do not bind and stocks are illiquid. We also find that informed short sellers are able to distinguish temporary overpricing from upward return momentum. However, when fundamental news is released, short sellers focus on exploiting negative fundamental changes rather than temporary overpricing. Short sellers contribute to market quality by correcting overpricing quickly over time, but they do not destabilize the market.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jun 13, 2015

References

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