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Does Short Selling Amplify Price Declines or Align Stocks with Their Fundamental Values?

Author

Listed:
  • Asher Curtis

    (Michael G. Foster School of Business, University of Washington, Seattle, Washington 98195)

  • Neil L. Fargher

    (College of Business and Economics, Australian National University, Canberra, Australian Capital Territory 0200, Australia)

Abstract

Critics of short selling argue that short sellers amplify price declines by targeting firms with falling prices in an unwarranted manner. Contrary to this viewpoint, we find that increases in short interest for firms following a price decline are associated with measures of overpricing based on financial statement analysis. Our results extend to short-selling activity following marketwide declines. We also find evidence consistent with the profitability of short selling following price declines being driven by valuation-based positions. Overall, our findings suggest short sellers primarily undertake valuation-based strategies following price declines and have implications for regulators. Limiting short selling following price declines is likely to impede efficient price discovery. This paper was accepted by Mary Barth, accounting .

Suggested Citation

  • Asher Curtis & Neil L. Fargher, 2014. "Does Short Selling Amplify Price Declines or Align Stocks with Their Fundamental Values?," Management Science, INFORMS, vol. 60(9), pages 2324-2340, September.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:9:p:2324-2340
    DOI: 10.1287/mnsc.2013.1872
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    References listed on IDEAS

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