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Short-Sale Restrictions and Market Reaction to Short-Interest Announcements

A. J. Senchack, Jr. and Laura T. Starks
The Journal of Financial and Quantitative Analysis
Vol. 28, No. 2 (Jun., 1993), pp. 177-194
DOI: 10.2307/2331285
Stable URL: http://www.jstor.org/stable/2331285
Page Count: 18
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Short-Sale Restrictions and Market Reaction to Short-Interest Announcements
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Abstract

According to the Diamond-Verrecchia hypothesis, if increases in short interest are correlated with information that is not yet public, they should precipitate a price adjustment. Stocks with unexpected increases in short interest are found to generate statistically significant, but small, negative abnormal returns for a short period around the announcement date. When the sample is divided into stocks with and without tradable options, nonoptioned stocks closely mimic these results but the optioned stocks do not. In a cross-sectional analysis of individual firms, the short-term negative abnormal returns are found to be 1) more negative, the higher the degree of unexpected short interest and, 2) less negative if the firm has tradable options.

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