Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange

Authors

  • Michael J. Aitken,

  • Alex Frino,

  • Michael S. McCorry,

  • Peter L. Swan


  • Aitken, Frino, and Swan are at the University of Sydney; McCorry is with Barclays Global Investors and the University of Sydney. This study was funded by the Australian Research Council and the Dean's Fund for Faculty Research, University of Sydney. We would also like to thank the Australian Stock Exchange and the Sydney Futures Exchange for supplying data, and the Securities Industry Research Centre of Asia-Pacific (SIRCA) for technical assistance. The paper was significantly improved by the comments of Rene Stulz (the editor) and an anonymous reviewer.

Abstract

This paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution. We find a mean reassessment of stock value following short sales of up to −0.20 percent with adverse information impounded within fifteen minutes or twenty trades. Short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction; trades near information events precipitate larger price reactions. The evidence is generally weaker for short sales executed using limit orders relative to market orders.

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