Short-Selling and Insiders

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 “supply-side” constraints in shorting the stock and therefore a reasonable measure of the “shorting demand”. We further project this measure on insider trades to compute the “informationally motivated shorting demand” 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 “informed high short interest” stocks and buys “informed low short interest stocks” 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: