Dechow et al. (2001)

Reference

Short-Sellers, Fundamental Analysis and Stock Returns^aa

Patricia M. Dechow, Amy P. Hutton, Lisa Meulbroek and Richard G. Sloan

The Journal of Financial Economics, Volume 61 (2001), 77-106.

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Synopsis

This paper provides evidence that stocks with high short positions significantly underperform the market over the next 12 months. The annual abnormal return generated by stocks with a short position of at least 5% of shares outstanding averages -18% (though such firms constitute less than 5% of their sample). The paper also shows that short-sellers employ trading strategies based on fundamental analysis. In particular, short-sellers target stocks with low ratios of fundamentals to price. However, short sellers are able to forecast returns beyond those that can be forecast by these ratios alone.