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Why Do Firms Disagree with Short Sellers? Managerial Myopia versus Private Information

Published online by Cambridge University Press:  18 October 2019

Leonce Bargeron  and
Alice Bonaime Open the ORCID record for Alice Bonaime [Opens in a new window]
Leonce Bargeron
Affiliation:
Bargeron, leonce.bargeron@uky.edu, University of Kentucky Gatton College of Business
Alice Bonaime*
Affiliation:
Bonaime, alicebonaime@email.arizona.edu, University of Arizona Eller College of Management
*
Bonaime (corresponding author), alicebonaime@email.arizona.edu
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Abstract

Though short sellers on average succeed at identifying overvalued equity, firms often signal disagreement with short sellers by repurchasing stock when short interest increases. We investigate whether this disagreement reflects a myopic defense of inflated prices, or positive private information. These repurchases appear motivated by managers’ private information, not agency issues, even when managerial benefits to short-termism are enhanced or monitoring is weaker. Managers’ informational advantage relates to subsequent news, earnings, and risk, but is attenuated if activists target management or insiders sell. A trading strategy based on our findings earns 7.5% annually.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 8 , December 2020 , pp. 2431 - 2465
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank Ekkehart Boehmer, Nicole Boyson, Igor Cunha, Dave Denis, Moqi Groen-Xu, Russell Jame, Brad Jordan, Kathy Kahle, Jon Karpoff, Jacob Oded, Matt Ringgenberg, Rick Sias, Esad Smajlbegović, Luke Stein, Shawn Thomas, and seminar participants at the American Finance Association (Philadelphia), the Financial Management Association Conference (Boston), the University of Arizona/Arizona State University joint finance conference, the University of Nebraska, and the University of Ottawa Telfer Annual Conference on Accounting and Finance for helpful comments. We also thank Vicente Cuñat and Moqi Groen-Xu for sharing their 8-K data and David Moore for excellent research assistance.

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