Firm, institutional and short sellers’ trading behavior around share repurchases

PurposeThis study investigates the valuation motive for increasing share repurchases: the authors analyze the trading dynamics between short sellers, institutional investors and the firm itself around share repurchases.Design/methodology/approachThe authors examine the valuation motive for share repurchases through an analysis of firm, institutional and short sellers’ trading behavior. The firm-level panel regression models using firm-quarter observations in the sample period are estimated.FindingsThe authors find that firms repurchase more intensely against increased short selling and that institutional investors trade in parallel with the repurchasing firm.Originality/valueResults suggest that firms disagree with short sellers’ intrinsic valuation of the firm, which is consistent with findings of recent studies such as Muzere (2019) and Bargeron and Bonaimé (2020).

Short Selling – On Ethics, Politics, and Culture

Lawyers and economists do not always speak the same language. Where economists present crisp and clear numbers, lawyers get lost in lengthy discussions about fairness and justice. Or so it seems. Arguably, the regulation of short selling illustrates a worrying clash of cultures. Economists understand short selling as a value-free market mechanism while (not only) lawyers suspect a profit, unfairly gained at the expense of others: “Short sellers not only profit from the misery of others, they also cause it”. In what follows, we address implications of this culture clash in the realm of ethics and politics. We conclude with a hypothesis, submitting that there might be traces of another clash to be observed when comparing regulatory cultures across countries. A preliminary look at data seems to suggest that short sale bans are less common in countries with a strong capital-market tradition and more common for countries which are newer to this game. If this holds true, important lessons are to be learned for the European Commission’s plan to set up a capital market union.

Short-Selling and Information Arrival around Earnings Announcements: Evidence from Regulation SHO

Short sellers assist in impounding negative news more quickly into stock prices and improve price informativeness. However, there is a lack of consistent evidence about whether short sellers trade predominantly in anticipation of, or in response to, a public information release. To shed light on this question, we exploit Reg SHO, which reduced the constraints faced by short sellers for a subsample of U.S. firms, to examine price informativeness before, during and after earnings announcements. We show that relative to control firms, pilot firms have greater (less) price informativeness before (during) earnings announcements, suggesting that short sellers trade in anticipation of public earnings news, rather than in response to the public news.

Ownership and Governance

Shareholders have, in recent years, imposed considerable influence on firms and the managers that run them. Their role has become so prevalent that hedge funds, activist investors, and short sellers dominate the headlines of the popular business press. Academics are desperately trying to keep up with the furious pace of change and incorporate emerging phenomena into theories of corporate governance. To facilitate this process, this chapter reviews the key forms of corporate ownership and describes ways in which they affect firm-level outcomes. The chapter identifies five issues about which ownership scholars disagree: the competitive influence of common shareholding, the costs and benefits of excess control, the consequences of share repurchases, the threat of short sellers, and the value-creating prospects of shareholder-nominated directors. The chapter describes the state of each debate with the hope that strategy scholars, in the years ahead, will add nuance to what we know about these pressing matters.

Do short sellers exacerbate volatility?

PurposeThis paper examines whether short sellers aggravate volatility in the Australian stock market by using five different realized volatility (RV) measures during a more stable period.Design/methodology/approachThe authors develop a measure to capture the abnormal level of short selling for each stock and examine the bivariate and trivariate dynamic relationships between abnormal short selling and five volatility measures: the RV, continuous and jump components of RV, upside and downside volatilities.FindingsOverall, the findings indicate a weak association between abnormal short selling and volatility. Where the relationships are significant, the authors generally find that lagged abnormal short selling is negatively associated with both upside and downside volatilities. In general, short selling does not drive or amplify the decline in stock prices.Originality/valueThis paper contributes to existing literature in various aspects. First, the authors offer evidence on the relationship between abnormal short selling and volatility in a general market condition while existing studies often found mixed results of the effects of short selling on volatility around extreme events. Second, the authors add to the literature on the volume-volatility relation by introducing abnormal short selling. Although abnormal short volume does not supplant the number of trades in the volume-volatility relation, it has some incremental, albeit negative, effect on volatility. Finally, the study provides further evidence for the debate on the desirability of short sellers in financial markets.