An Investigation of the Informational Role of Short Interest in the Nasdaq Market

Authors

  • Hemang Desai,

  • K. Ramesh,

  • S. Ramu Thiagarajan,

  • Bala V. Balachandran

    Search for more papers by this author
    • Hemang Desai is at the Cox School of Business, Southern Methodist University. K. Ramesh is at Analysis Group/Economics, Boston, MA. S. Ramu Thiagarajan is at Mellon Capital Management, San Francisco, CA, and Bala V. Balachandran is at Northwestern University. We are especially grateful to Mike Vetsuypens for comments and suggestions that have led to significant improvements in this paper. We acknowledge helpful comments of an anonymous referee; Linda Bamber; Venkat Eleswarapu; Larry Glosten; Richard Green (the editor); Lex Huberts; Ravi Jagannathan; Prem Jain; S.P. Kothari; Srini Krishnamurthy; James Livingston; Dave Mauer; Tim McCormick; Mitch Petersen; Srini Rangan; Jay Shanken; Wayne Shaw; Avanidhar Subrahmanyam; Rex Thompson; Sheridan Titman; Kumar Venkatraman; Beverly Walther; Jerry Warner; Larry Weiss; William Wink; and the workshop participants at the University of Georgia, INSEAD, Mellon Capital Management, the University of Rochester, and the State University of New York (Buffalo). We thank the Nasdaq Stock Market for providing the data used in this study and Kenneth French and Mark Carhart for providing the factor returns. Any errors or omissions are the responsibility of the authors.

ABSTRACT

This paper examines the relationship between the level of short interest and stock returns in the Nasdaq market from June 1988 through December 1994. We find that heavily shorted firms experience significant negative abnormal returns ranging from −0.76 to −1.13 percent per month after controlling for the market, size, book-to-market, and momentum factors. These negative returns increase with the level of short interest, indicating that a higher level of short interest is a stronger bearish signal. We find that heavily shorted firms are more likely to be delisted compared to their size, book-to-market, and momentum matched control firms.

Ancillary