The relationship between short interest and stock returns in the Canadian market |
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| Institution: | 1. Department of Economics, Uppsala University, Uppsala Center for Fiscal Studies, Box 513, SE-751 20 Uppsala, Sweden;2. Institute for Evaluation of Labour Market and Education Policy (IFAU), SE-751 20 Uppsala, Sweden;1. Ivey Business School, Western University (formerly University of Western Ontario), 1255 Western Road, London, Ontario N6G 0N1, Canada;2. Schulich School of Business, York University, 99 Ian Macdonald Blvd., Toronto, Ontario M3J 1P3, Canada;3. A. B. Freeman School of Business, Tulane University, 7 McAlister Drive, New Orleans, LA 70118, USA;1. University of Florida, Warrington College of Business Administration, Bryan Hall, Gainesville, FL 32611, U.S.A.;2. Western University, Ivey School of Business, 1255 Western Road, Room 3353, London, Ontario N6G 0N1, Canada;1. Ivey Business School, Western University, 1255 Western Rd., London, ON N6G 0N1, Canada;2. Bissett School of Business, Mount Royal University, 4825 Mount Royal Gate S.W., Calgary, AB T3E 6K6, Canada;1. School of Management, New Jersey Institute of Technology, University Heights, Newark, NJ 07102, USA;2. Department of Finance, National Chung Cheng University, #168, Sec. 1 University Rd, Min-Hsiung, Chia-Yi 621, Taiwan, ROC;3. Department of Economics and Business, City College of New York, CUNY, 160 Convent Avenue, New York, NY 10031, USA |
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| Abstract: | This paper provides new insight into the relationship between short sales and stock market returns using a sample of stocks sold short in Canada. Short interest is defined in relation to trading volume. The results strongly support the assertion that short sales and excess returns are contemporaneously negatively correlated in Canada. The paper further finds that excess returns are more negative for small firms because the supply of shortable shares is constrained for these firms. Excess returns are less negative for stocks with associated options and convertible bonds. Importantly, the evidence is consistent with the proposition that informed traders short sell Canadian interlisted stocks in Canada, rather than the US, to exploit lower execution costs. Together the results suggest that less restrictive regulation of short sales will improve the efficiency of markets. |
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