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Short Selling and the News

Short Selling and the News. Adam V. Reed UNC RMA October 2011. Some recent accusations…. TIME Are Short Sellers to Blame for the Financial Crisis? By BILL SAPORITO Thursday, Sep. 18, 2008

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Short Selling and the News

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  1. Short Selling and the News Adam V. Reed UNC RMA October 2011

  2. Some recent accusations… TIME Are Short Sellers to Blame for the Financial Crisis? By BILL SAPORITO Thursday, Sep. 18, 2008 • "It was sad to see Merrill go down as well," said the voice from inside Lehman Brothers this week as he pondered his own future. "But at least they screwed the shorts. That was good to see." • It was also, at least in the minds of many angry investment bank CEOs, a long time coming. In the months leading up to the current market chaos, the short sellers have been on the prowl. But now the witch hunt has begun. The shorts nailed Lehman and Bear Stearns by betting that their shares would continue to fall. And now they have Morgan Stanley and Goldman Sachs in their sights, sparking speculation that the last two remaining go-it-alone investment banking giants may have to find a deep-pocketed commercial bank to partner up with. "What's happening out there? It's very clear to me — we're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down," fumed John Mack, CEO of Morgan Stanley, in a memo to employees. "You should know that the Management Committee and I are taking every step possible to stop this irresponsible action in the market. We have talked to Secretary [Hank] Paulson and the Treasury. We have talked to Chairman [Chris] Cox and the SEC." Cox is listening, and is reportedly proposing a temporary ban on short selling, subject to approval by the SEC's commissioners. If short sellers could be rounded up and roasted as heretics to the true bull market religion, there'd be a rush of people from Lehman and Merrill fighting to add wood to the fire. And Mack would bring the gasoline. • … • Also on Thursday Britain said it will ban all short selling of financial stocks until at least next January, while New York Attorney General Andrew Cuomo announced that he was launching an investigation into complaints of short sellers spreading false rumors about targeted companies like Lehman Brothers, AIG, Goldman Sachs and Morgan Stanley. “It's very clear to me — we're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down” -John Mack, CEO of Morgan Stanley …New York Attorney General Andrew Cuomo launching an investigation into complaints of short sellers spreading false rumors about targeted companies like Lehman Brothers, AIG, Goldman Sachs and Morgan Stanley….

  3. Some Basic Questions • Do short sellers anticipate or react to the release of public information? • Does short sellers’ informational advantage come from public news? • Does their ability to process information depend on the type of news? • Joins other notable papers: • Fox, Glosten, and Tetlock (2010) • Boehmer, Jones & Zhang (2010) • Purnanandam and Seyhun1 (2011)

  4. Sample News Article GlaxoSmithKline And EPIX Pharmaceuticals Enter Drug Discovery And Development Alliance DOW JONES NEWSWIRES Epix Pharmaceuticals Inc. (EPIX) said it entered into a drug discovery and development pact with GlaxoSmithKline (GSK). As part of deal, Epix will receive an upfront payment of $35 million, which includes $17.5 million from the sale of 3 million shares of its common stock. Epix will also be eligible for up to $1.2 billion for the achievement of certain milestones, and royalties on product sales. Epix shares closed Monday unchanged at $5.52 and Glaxo shares fell 9 cents to $52.43. Epix said it expects to end 2006 with more than $100 million in cash and marketable securities. The company expects that its existing cash and marketable securities together with the expected revenue from the GlaxoSmithKline collaboration and other partnerships will be sufficient to fund operations through 2008. Dow Jones Database Story code = 20061212003980 Date = 12/12/2006, Time = 06:12:00:29, 06:12:02:36, 06:12:16:34, 06:12:24:59 Firm Tickers = EPIX, GSK Subject Codes = CNW, DJEN, DJGP, DJGS, DJGV, DJI, DJIN, DJIV, FCTV, SPOT, WEI, RND, HDL

  5. Timing: Do Short Sellers Anticipate News?

  6. Do Short Sellers Profit from Processing News? reti;t+1,t+20= α+ β1SVRit + (βn+1News indicatorn,it) + (βn+4SVR*Newsn,it) + controls Table V – All Trades

  7. Buy and Hold Portfolio Returns following News Events (not in the paper) News Category: Earnings Projections Firms with a News Event Control Sample High Short Volume Low Short Volume

  8. Conclusions • Contrary to popular opinion, short sellers do not anticipate news events. Generally, they trade when the market trades and overall they trade after everyone else. • The trades short-sellers make on news trades outperform the trades they make off news days. • More generally, we shed light on the role of news in resolving information asymmetry. • The results here provide caution: news may create informational advantages for agents who are skilled processors.

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