The Information Content of Short Interest: A Natural Experiment

An increase in the cost of selling short should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market. We extend the Diamond and Verrecchia (1987) model to include short selling against the box and test the extended...

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Published inThe Journal of business (Chicago, Ill.) Vol. 78; no. 4; pp. 1307 - 1336
Main Authors Arnold, Tom, Butler, Alexander W., Crack, Timothy Falcon, Zhang, Yan
Format Journal Article
LanguageEnglish
Published Chicago The University of Chicago Press 01.07.2005
University of Chicago, acting through its Press
Subjects
Capital gains
Convertible securities
Correlation analysis
Costs
Economic models
Experiments
Financial analysis
Financial information
Financial research
Information content
Investments
Investors
Legislation
Market structure
Nasdaq Composite Index
Net present value
Opportunity costs
Regulation
Shares outstanding
Short sales
Stock exchanges
Stock prices
Stock returns
Stock sales
Stock shares
Stocks
Studies
Tax benefits
Tax rates
Taxes
Taxpayer Relief Act 1997-US
U.S.A
United States > US
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Summary:An increase in the cost of selling short should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market. We extend the Diamond and Verrecchia (1987) model to include short selling against the box and test the extended model using a natural experiment based around the Taxpayer Relief Act of 1997 (TRA97). TRA97 made short selling more costly for those shorting against the box. Consistent with the implications of our extended model, this increase in short‐selling costs strengthens the negative relationship between short interest and subsequent stock price performance post TRA97.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0021-9398
1537-5374
DOI:10.1086/430861