What Do Short Sellers Know?

Using a five-year panel of proprietary NYSE short sale order data, we investigate the sources of short sellers’ informational advantage. Heavier shorting is found the week before negative earnings surprises, analyst downgrades, and downward revisions in analyst earnings forecasts. The biggest effects are associated with analyst downgrades. While earnings and analyst event days constitute only 12% of sample days, they account for over 24% of the overall underperformance of heavily shorted stocks. The results are robust to factor timing and indicate that short sellers are well-informed about upcoming earnings news and are able to anticipate analyst recommendation changes. Shorting predictability is still significant after controlling for information in analyst actions, suggesting that short sellers know more than analysts about firm fundamentals. Finally, we find no evidence of price manipulation by short sellers.

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