Missed this paper until now, but it’s an interesting look at how you can begin to parse out informed short-sellers in public stocks via insider-selling data:
We examine the return predictability of short selling activities for NYSE/AMEX stocks. We use a measure of short interest that is more likely to be free from the â€œsupply-sideâ€ constraints in shorting the stock and therefore a reasonable measure of the â€œshorting demandâ€. We further project this measure on insider trades to compute the â€œinformationally motivated shorting demandâ€ to analyze the return predictability of short-selling activities. We document economically large profits to information based short-selling activities both when short-sellers increase their short position and when they cover them. An extreme portfolio that sells â€œinformed high short interestâ€ stocks and buys â€œinformed low short interest stocksâ€ earn economically large four-factor model-adjusted returns of 0.82% to 1.22% per month. These results are robust to various models for risk benchmarking and across large and small stocks. Our results show that the short-selling activities are considerably informative about future stock returns.
Purnanandam, Amiyatosh K. and Seyhun, Hasan Nejat, “Shorts and Insiders” (July 30, 2007).
Available at SSRN: http://ssrn.com/abstract=1004155
[SSRN via CXOAG]