Do shorting flows predict negative stock returns? Evidence from the U.S. markets

Abstract

This thesis examines the relation between daily shorting flows and future stock returns. The results show that shorting flows continue to predict negative future stock returns during 2010-2019 when daily short sale volumes are publicly available in real-time. The predictive ability of shorting flows weakens slowly and lasts for a year. This indicates that short sellers are informed, and market prices are slow to reflect the public shorting information. A comparison with years 2016-2019 shows that the predictability of shorting flows is relatively weaker during this sample period than 2010-2019. During 2016-2019, the predictive ability of shorting flows lasts for a year only for equal-weighted portfolios. For value-weighted portfolios, shorting flows predict negative future stock returns a maximum of three months and even then, the predictability is hardly significant. These results suggests that during 2016-2019, the predictive ability of shorting flows is much weaker and shorter term for larger companies.