Keywords

short interest, analyst recommendations, fundamental analysis, arbitrage

Abstract

We investigate whether short sellers and analysts differ in their use of information that is predictive of future returns. We find that open short interest is significantly associated in the expected direction with all eleven variables examined. In contrast, analysts tend to positively recommend stocks with high growth, high accruals, and low book-to-market ratios, despite these variables having a negative association with future returns. We then investigate the profitability of using short interest in trading. We find abnormal returns (1.11 percent per month) from a zero-investment strategy that (1) shorts firms with highly favorable analyst recommendations (buy signal) but high short interest (sell signal), and (2) buys firms with highly unfavorable analyst recommendations (sell signal) but low short interest (buy signal). Short interest, therefore, appears to capture predictive information that can be used by investors in trading against analysts’ recommendations to increase returns.

Original Publication Citation

Drake, Michael S. and Rees, Lynn L. and Swanson, Edward P., Should Investors Follow the Prophets or the Bears? Evidence on the Use of Public Information by Analysts and Short Sellers. The Accounting Review 86 (1), 2011. Available at SSRN: https://ssrn.com/abstract=1269427 or http://dx.doi.org/10.2139/ssrn.1269427

Document Type

Peer-Reviewed Article

Publication Date

2011

Publisher

The Accounting Review

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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