Are Shorts Equally Informed? A Global Perspective

Using a daily sample of 25 countries from 2006 to 2010, we examine whether information from shorts can significantly predict future stock returns across different countries. We construct seven shorting measures using past shorting transactions, and fees information in the lending market. The majority of our shorting measures significantly predict future stock returns. Interestingly, the relative importance of these variables varies substantially across countries. We explain the cross-country differences with variations in regulations on short selling, market quality and country development measures. The recent naked short sale bans strengthen the informativeness of shorting. The presence of a centralized stock lending market and low liquidity weaken the return predictability of short selling. In addition, higher country GDP per-capita, as well as country market openness, enhances short sales’ informativeness.