Loading...
Why do firm fundamentals predict returns? Evidence from short selling activity
Mazouz, K.
Mazouz, K.
Publication Date
2022-01
End of Embargo
Supervisor
Keywords
Rights
© 2022 Elsevier. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Peer-Reviewed
Yes
Open Access status
openAccess
Accepted for publication
05/11/2021
Institution
Department
Awarded
Embargo end date
Collections
Additional title
Abstract
This study uses short selling activity to test whether the relation between fundamentals and future returns is due to rational pricing or mispricing. We find that short sellers target firms with fundamental performance below market expectations. We also show that short selling activity reduces the return predictability of fundamentals by speeding up the price adjustments to negative fundamental signals. To further investigate whether the returns earned by short sellers reflect rational risk premia or mispricing, we exploit a natural experiment, namely Regulation of SHO, which creates exogenous shocks to short selling by temporarily relaxing short-sale constraints. Evidence from the experiment confirms that the superior returns to short sellers result from exploiting overpricing. Overall, our study suggests that the return predictability of fundamentals reflects mispricing rather than rational risk premia.
Version
Accepted manuscript
Citation
Mazouz K and Wu Y (2022) Why do firm fundamentals predict returns? Evidence from short selling activity. International Review of Financial Analysis. 79: 101974.
Link to publisher’s version
Link to published version
Link to Version of Record
Type
Article