Concentrated short‐selling activity: bear raids or contrarian trading?

Purpose - The purpose of this paper is to investigate what is denoted as episodes of concentrated short-selling activity, or consecutive days of abnormal short-sale activity in a particular stock. The motivation to do so is two fold. First, US regulators and regulators in other countries have restricted short selling in order to protect the integrity of markets. Second, there is some conflicting academic research determining whether short sellers are manipulative in nature. Design/methodology/approach - After defining these episodes by concentrated short selling, the paper examines returns before and after to determine whether these episodes target struggling stocks and whether these episodes predict negative returns. Findings - Contrary to the argument that episodes of concentrated shorting activity target struggling stocks, it is found that these episodes follow periods of positive returns. Further, it is found that abnormal volatility and high trading volume also predict the occurrence of these episodes. These results suggest that concentrated shorting occurs in stocks that are increasing in price during periods of heterogeneity among investors expectations (Berkman Originality/value - The results from this study have important regulatory implications as well as implications regarding the informational efficiency of stock prices.