Are Short Sellers Informed? Evidence from the 2007–2008 Subprime Mortgage Crisis


  • We thank Murali Jagannathan, Srinivasan Krishnamurthy, Y.C. Loon, Kristian Rydqvist, Steve Schwartz, Sabatino Silveri and seminar participants at 2010 American Accounting Association annual meeting, 2010 New York Accounting and Finance Forum, 2010 FMA annual meeting, 2009 Eastern Finance Association annual meeting, 2009 Southern Finance Association annual meeting.

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This paper examines the short selling activities around financial firms’ announcements of asset write-downs during the 2007–2008 subprime mortgage crisis. We find that short sellers accumulate short positions prior to write-down announcements, and that stocks experience significantly negative returns around such announcements. These results suggest that the return predictability of short interests is due to short sellers’ informational advantage. Furthermore, we show that short sellers increase their positions significantly in the announcement month and keep increasing their positions afterward, suggesting the feedback effect of the disclosed write-downs on financial firms’ existing exposures. The valuable information contained in the short interest should encourage regulators to mandate stock exchanges disclose short selling activities more frequently.