Abstract:
Short selling has had a very controversial existence. Bear raids and short and distort schemes tend to be the extent of the typical investors knowledge of short selling. Negative public opinion toward short-sellers ebbs and wanes as the market falls and rises. However, at best short sellers act unnoticed and during the worst times they become pariahs for the negative effects of down markets. Unbiased information about short selling is rare. This paper looks to uncover the truth behind short selling and serve as a counter to the negative public opinion of short selling.Several academic journal studies on short selling are examined to determine whether or increases in short interest volume precludes a down market or visa versa. Also examined in detail are the effects of regulation on short selling. Results from the academic studies are mixed; however, most studies lean toward the idea that short interest volume has no effect on the market. A few conclude that down markets tend to follow short interest. Only one concluded in favor of increases in short interest precluding a bull market.This study of NASDAQ technology stocks examines whether or not the release of short interest information triggers reaction in the prices of technology stocks. This reaction is measured in three tests involving, independently: short interest volume, short interest ratios and market value. These tests answer the question: is the level of short interest volume a predictor of future returns in technology stocks?Three conclusions are drawn from the study. First, on the day prior to the release of short interest information, NASDAQ technology stocks generate unexpected positive returns, and on the date of the release of the short interest information and the following day unexpected negative abnormal returns are generated.Second, short interest volume appeared to predict future abnormal returns. The short interest ratio failed to be a predictor of abnormal returns. Abnormal returns appear again when market value is used as the determining variable.Third, some conclusions can be drawn about the pattern that appears in the market value study. It appears that the market processes negative information about stocks with the largest market value over the short-term, in the day following an announcement of short interest. However, it appears that negative information takes longer to process for stocks of mid-to-large market value.
