Date of Award

Spring 2016

Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration-Finance

Committee Director

Licheng Sun

Committee Member

Mohammad Najand

Committee Member

David Selover


This dissertation provides some new evidence that the information contained in short selling is informative about future returns, confirming the role of short sellers in the price discovery process.

The first essay examines the cross-sectional relation between the change in short interest and expected stock returns. NYSE/AMEX stocks with large decreases (increases) in short interest over past medium-term horizon experience significant and positive (negative) abnormal returns. Moreover, the positive abnormal returns are larger in absolute value and are more persistent than negative abnormal returns. The return spread between bottom and top deciles is economically and statistically significant and persistent. The return predictability of the change in short interest is not subsumed by the level of short interest and other well-known determinants of stock returns, and is robust in different calendar months and investor sentiment. These results imply that public information contained in the change in short interest is so slowly incorporated into prices. Moreover, the asymmetry in the speed of price adjustment casts doubts on the implication of short-sale constraints and the limits to arbitrage.

The second essay provides new evidence that momentum and long-term reversals would be separate phenomena. We can identify ex ante momentum stocks that exhibit persistent momentum and those that exhibit weak momentum but persistent reversals, using information in short selling. Underreaction and overreaction theories apply to different sets of momentum stocks. The consistent momentum strategy based on short interest succeeds during periods in which the standard momentum strategy fails. The success of the consistent momentum strategy is mainly due to the robust return predictability of short interest in these periods. These evidence confirms that short sellers contribute to price discovery. The information in short selling provides a great hedge or complement to anomaly-based strategies.