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Short Interest and Frictions in the Flow of Information


  • This paper has benefited greatly from helpful comments by an anonymous referee, Tyler Brough, Frank Caliendo, Drew Dahl, D. J. Fairhurst, Scott Findley, Mike Pinegar, Philip Tew, Robert Van Ness, Bonnie Van Ness, and seminar participants at Utah State University.


This paper examines the correlation between short interest and price delay that parsimoniously measures the delay with which stock prices incorporate information. I find that price delay relates inversely to short interest indicating that short sellers reduce friction in the flow of information into stock prices. While price delay is shown to predict positive returns, this is mostly true in stocks with the least amount of short interest. Multivariate tests determine that the positive relationship between delay and future returns is decreasing in short interest. Results suggest that short sellers reduce delay and arbitrage the return premium commanded by delay.