Should Investors Follow the Prophets or the Bears? Evidence on the Use of Public Information by Analysts and Short Sellers Academic Article uri icon

abstract

  • We investigate whether short sellers and analysts differ in their use of information that is predictive of future returns. We find that short interest is significantly associated in the expected direction with all 11 variables examined. In contrast, ana-lysts 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.

altmetric score

  • 16.85

author list (cited authors)

  • Drake, M. S., Rees, L., & Swanson, E. P.

citation count

  • 103

publication date

  • January 2011