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Concentrated short‐selling activity: bear raids or contrarian trading?

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Listed:
  • Benjamin Blau
  • Tyler J. Brough

Abstract

Purpose - The purpose of this paper is to investigate what is denoted as episodes of concentrated short‐selling activity, or consecutive days of abnormal short‐sale activity in a particular stock. The motivation to do so is two fold. First, US regulators and regulators in other countries have restricted short selling in order to protect the integrity of markets. Second, there is some conflicting academic research determining whether short sellers are manipulative in nature. Design/methodology/approach - After defining these episodes by concentrated short selling, the paper examines returns before and after to determine whether these episodes target struggling stocks and whether these episodes predict negative returns. Findings - Contrary to the argument that episodes of concentrated shorting activity target struggling stocks, it is found that these episodes follow periods of positive returns. Further, it is found that abnormal volatility and high trading volume also predict the occurrence of these episodes. These results suggest that concentrated shorting occurs in stocks that are increasing in price during periods of heterogeneity among investors expectations (Berkmanet al.). It is also found that short sellers during bear raids are able to predict when prices reverse as returns become negative the day after the last day of the raid. Combined, the results suggest that bear raids by short sellers are important for the efficiency of markets. Originality/value - The results from this study have important regulatory implications as well as implications regarding the informational efficiency of stock prices.

Suggested Citation

  • Benjamin Blau & Tyler J. Brough, 2012. "Concentrated short‐selling activity: bear raids or contrarian trading?," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 8(3), pages 187-203, June.
    • Handle: RePEc:eme:ijmfpp:v:8:y:2012:i:3:p:187-203
    DOI: 10.1108/17439131211238851
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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