Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T08:43:12.239Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

Almeida, H.; Fos, V.; and Kronlund, M.. “The Real Effects of Share Repurchases.” Journal of Financial Economics, 119 (2016), 168–185.CrossRefGoogle Scholar
Amihud, Y.“Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Asquith, P., and Meulbroek, L.. “An Empirical Investigation of Short Interest.” Working Paper, Massachusetts Institute of Technology and Claremont McKenna College (1995).Google Scholar
Asquith, P.; Pathak, P.; and Ritter, J.. “Short Interest, Institutional Ownership, and Stock Returns.” Journal of Financial Economics, 78 (2005), 243–276.CrossRefGoogle Scholar
Babenko, I.; Tserlukevich, Y.; and Vedrashko, A.. “The Credibility of Open Market Share Repurchase Signaling.” Journal of Financial and Quantitative Analysis, 47 (2012), 1059–1088.10.1017/S0022109012000312CrossRefGoogle Scholar
Bargeron, L.; Bonaime, A.; and Thomas, S.. “The Timing and Source of Long-Run Returns Following Repurchases.” Journal of Financial and Quantitative Analysis, 52 (2017), 491–517.CrossRefGoogle Scholar
Ben-David, I.; Drake, M.; and Roulstone, D.. “Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest.” Journal of Financial and Quantitative Analysis, 50 (2015), 1–32.CrossRefGoogle Scholar
Ben-Rephael, A.; Oded, J.; and Wohl, A.. “Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures.” Review of Finance, 18 (2014), 1299–1340.CrossRefGoogle Scholar
Blocher, J.; Reed, A.; and Van Wesep, E.. “Connecting Two Markets: An Equilibrium Framework for Shorts, Longs, and Stock Loans.” Journal of Financial Economics, 108 (2013), 302–322.10.1016/j.jfineco.2012.12.006CrossRefGoogle Scholar
Boehmer, E.; Huszar, Z.; and Jordan, B.. “The Good News in Short Interest.” Journal of Financial Economics, 96 (2010), 80–97.CrossRefGoogle Scholar
Boehmer, E.; Jones, C.; and Zhang, X.. “Which Shorts Are Informed? ” Journal of Finance, 63 (2008), 491–527.10.1111/j.1540-6261.2008.01324.xCrossRefGoogle Scholar
Boehmer, E.; Jones, C.; and Zhang, X.. “What Do Short Sellers Know?” Working Paper, Singapore Management University, Columbia Business School, and Tsinghua University (2015).Google Scholar
Boehmer, E., and Wu, J.. “Short Selling and the Price Discovery Process.” Review of Financial Studies, 26 (2013), 287–322.CrossRefGoogle Scholar
Bonaime, A.“Repurchases, Reputation, and Returns.” Journal of Financial and Quantitative Analysis, 47 (2012), 469–491.CrossRefGoogle Scholar
Bonaime, A., and Ryngaert, M.. “Insider Trading and Share Repurchases: Do Insiders and Firms Trade in the Same Direction? ” Journal of Corporate Finance, 22 (2013), 35–53.10.1016/j.jcorpfin.2013.03.003CrossRefGoogle Scholar
Brav, A.; Graham, J.; Harvey, C.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Finance, 77 (2005), 483–527.Google Scholar
Brav, A.; Jiang, W.; Partnoy, F.; and Thomas, R.. “Hedge Fund Activism, Corporate Governance, and Firm Performance.” The Journal of Finance, 63 (2008), 1729–1775.CrossRefGoogle Scholar
Campello, M.; Matta, R.; and Saffi, P.. “The Rise of the Equity Lending Market: Implications for Corporate Financial Policies.” Working Paper, Cornell University, SKEMA Business School, and University of Cambridge (2018).Google Scholar
Chan, K.; Ikenberry, D.; and Lee, I.. “Economic Sources of Gain in Stock Repurchases.” Journal of Financial and Quantitative Analysis, 39 (2004), 461–479.CrossRefGoogle Scholar
Cheng, Y.; Harford, J.; and Zhang, T.. “Bonus-Driven Repurchases.” Journal of Financial and Quantitative Analysis, 50 (2015), 447–475.CrossRefGoogle Scholar
Christophe, S.; Ferri, M.; and Angel, J.. “Short-Selling Prior to Earnings Announcements.” Journal of Finance, 59 (2004), 1845–1875.CrossRefGoogle Scholar
Christophe, S.; Ferri, M.; and Hsieh, J.. “Informed Trading Before Analyst Downgrades: Evidence from Short Sellers.” Journal of Financial Economics, 95 (2010), 85–106.CrossRefGoogle Scholar
Clifford, C.“Value Destruction or Creation? Hedge Funds as Shareholder Activists.” Journal of Corporate Finance, 14 (2008), 323–336.CrossRefGoogle Scholar
Cohen, L.; Malloy, C.; and Pomorski, L.. “Decoding Inside Information.” Journal of Finance, 67 (2012), 1009–1043.CrossRefGoogle Scholar
Comment, R., and Jarrell, G.. “The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases.” Journal of Finance, 46 (1991), 1243–1271.CrossRefGoogle Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.10.1111/j.1540-6261.1997.tb02724.xCrossRefGoogle Scholar
Dechow, P.; Hutton, A.; Meulbroek, L.; and Sloan, R.. “Short-Sellers, Fundamental Analysis, and Stock Returns.” Journal of Financial Economics, 61 (2001), 77–106.CrossRefGoogle Scholar
Desai, H.; Ramesh, K.; Thiagarajan, S.; and Balachandran, B.. “An Investigation of the Informational Role of Short Interest in the Nasdaq Market.” Journal of Finance, 57 (2002), 2263–2287.10.1111/0022-1082.00495CrossRefGoogle Scholar
Diamond, D., and Verrechia, R.. “Constraints on Short-Selling and Asset Price Adjustment to Private Information.” Journal of Financial Economics, 18 (1987), 277–311.CrossRefGoogle Scholar
Diether, K.“Short Selling, Timing and Profitability.” Working Paper, available at http://diether.org/papers/profit.pdf (2008).Google Scholar
Diether, K.; Lee, K.; and Werner, I.. “It’s SHO Time! Short-Sale Price Tests and Market Quality.” Journal of Finance, 64 (2009), 37–73.CrossRefGoogle Scholar
Dittmar, A.“Why Do Firms Repurchase Stock? ” Journal of Business, 73 (2000), 331–355.CrossRefGoogle Scholar
Dittmar, A., and Dittmar, R.. “The Timing of Financing Decisions: An Examination of the Correlation in Financing Waves.” Journal of Financial Economics, 90 (2008), 59–83.CrossRefGoogle Scholar
Drake, M.; Rees, L.; and Swanson, E.. “Should Investors Follow the Prophets or the Bears? Evidence on the Use of Public Information by Analysts and Short Sellers.” Accounting Review, 86 (2011), 101–130.CrossRefGoogle Scholar
Edmans, A.; Fang, V.; and Huang, A.. “The Long-Term Consequences of Short-Term Incentives.” Working Paper, London Business School, University of Minnesota, and Hong Kong University of Science and Technology (2018).CrossRefGoogle Scholar
Edmans, A.; Fang, V.; and Lewellen, K.. “Equity Vesting and Investment.” Review of Financial Studies, 30 (2017), 2229–2271.CrossRefGoogle Scholar
Edmans, A.; Goncalves-Pinto, L.; Groen-Xu, M.; and Wang, Y.. “Strategic News Releases in Equity Vesting Months.” Review of Financial Studies, 31 (2018), 4099–4141.CrossRefGoogle Scholar
Farrell, K.; Unlu, E.; and Yu, J.. “Stock Repurchases as an Earnings Management Mechanism: The Impact of Financing Constraints.” Journal of Corporate Finance, 25 (2014), 1–15.CrossRefGoogle Scholar
Farre-Mensa, J.; Michaely, R.; and Schmalz, M.. “Payout Policy.” Annual Review of Financial Economics, 6 (2014), 75–134.10.1146/annurev-financial-110613-034259CrossRefGoogle Scholar
Graham, J.; Harvey, C.; and Rajgopal, S.. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics, 40 (2005), 3–73.CrossRefGoogle Scholar
Grinstein, Y., and Michaely, R.. “Institutional Holdings and Payout Policy.” Journal of Finance, 60 (2005), 1389–1426.10.1111/j.1540-6261.2005.00765.xCrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “The Information Content of Share Repurchase Programs.” Journal of Finance, 59 (2004), 651–680.CrossRefGoogle Scholar
Grullon, G.; Michenaud, S.; and Weston, J. P.. “The Real Effects of Short-Selling Constraints.” Review of Financial Studies, 28 (2015), 1737–1767.CrossRefGoogle Scholar
Hillert, A.; Maug, E.; and Obernberger, S.. “Stock Repurchases and Liquidity.” Journal of Financial Economics, 119 (2016), 186–209.CrossRefGoogle Scholar
Hribar, P.; Jenkins, N.; and Johnson, B.. “Stock Repurchases as an Earnings Management Device.” Journal of Accounting and Economics, 41 (2006), 3–27.CrossRefGoogle Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Share Repurchases.” Journal of Financial Economics, 39 (1995), 181–208.CrossRefGoogle Scholar
Jiao, Y.; Massa, M.; and Zhang, H.. “Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand.” Journal of Financial Economics, 122 (2016), 544–567.CrossRefGoogle Scholar
Karpoff, J., and Lou, X.. “Short Sellers and Financial Misconduct.” Journal of Finance, 65 (2010), 1879–1914.CrossRefGoogle Scholar
Klein, A., and Zur, E.. “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.” Journal of Finance, 64 (2009), 187–229.CrossRefGoogle Scholar
Lamont, O.“Go Down Fighting: Short Sellers vs. Firms.” Review of Asset Pricing Studies, 2 (2012), 1–30.CrossRefGoogle Scholar
Liu, H., and Swanson, E.. “Is Price Support a Motive for Increasing Share Repurchases? ” Journal of Corporate Finance, 38 (2016), 77–91.CrossRefGoogle Scholar
Louis, H.; Sun, A.; and White, H.. “Insider Trading After Repurchase Tender Offer Announcements: Timing versus Informed Trading.” Financial Management, 39 (2010), 301–322.CrossRefGoogle Scholar
Manconi, A.; Peyer, U.; and Vermaelen, T.. “Are Buybacks Good for Long-Term Shareholder Value? Evidence from Buybacks around the World.” Journal of Financial and Quantitative Analysis, 54 (2019), 1899–1935.CrossRefGoogle Scholar
Massa, M.; Qian, W.; Xu, W.; and Zhang, H.. “Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling? ” Journal of Financial Economics, 118 (2015), 268–288.CrossRefGoogle Scholar
Massa, M.; Rehman, Z.; and Vermaelen, T.. “Mimicking Repurchases.” Journal of Financial Economics, 84 (2007), 624–666.CrossRefGoogle Scholar
Moore, D.“Managerial Self-Interest and Strategic Repurchases: Evidence from Equity Vesting Schedules.” Working Paper, Loyola Marymount University (2018).CrossRefGoogle Scholar
Nezafat, M.; Shen, T.; Wang, Q.; and Wu, J.. “Longs, Shorts, and the Cross-Section of Stock Returns.” Working Paper, Michigan State University, Tsinghua University, University of Central Florida, and University of Nebraska (2019).Google Scholar
Peyer, U., and Vermaelen, T.. “The Nature and Persistence of Buyback Anomalies.” Journal of Financial Economics, 22 (2009), 1693–1745.Google Scholar
Piotroski, J., and Roulstone, D.. “The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices.” Accounting Review, 79 (2004), 1119–1151.CrossRefGoogle Scholar
Reed, A.“Short Selling.” Annual Review of Financial Economics, 5 (2013), 245–258.CrossRefGoogle Scholar
Saffi, P., and Sigurdsson, K.. “Price Efficiency and Short Selling.” Review of Financial Studies, 24 (2011), 821–852.CrossRefGoogle Scholar
Senchack, A., and Starks, L.. “Short-Sale Restrictions and Market Reaction to Short-Interest Announcements.” Journal of Financial and Quantitative Analysis, 28 (1993), 177–194.CrossRefGoogle Scholar
Stein, J.“Takeover Threats and Managerial Myopia.” Journal of Political Economy, 96 (1988), 61–80.CrossRefGoogle Scholar
Stein, J.“Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 104 (1989), 655–669.CrossRefGoogle Scholar
Vermaelen, T.“Common Stock Repurchases and Market Signalling: An Empirical Study.” Journal of Financial Economics, 9 (1981), 139–183.CrossRefGoogle Scholar
Supplementary material: File

Bargeron and Bonaime supplementary material

Bargeron and Bonaime supplementary material

Download Bargeron and Bonaime supplementary material(File)
File 261.1 KB