Earnings season is upon us and companies are now reporting their financial results for the quarter ending June 30. This makes things a little more interesting for those of us who follow short-selling activity because academic studies have found that a rising short position ahead of a financial report portends bad news and an adverse impact on the stock price.
One of the seminal papers in this regard is “Short-Selling Prior to Earnings Announcements” published by Stephen E. Christophe and co-authors in the Journal of Finance. Note that the professors conclude there is only a tendency, not a certainty, for the inverse relationship to hold between short sales and the impact of quarterly reports. Nor does the scholarly literature have a complete consensus on the matter.
For most investors, the decision to buy or sell a stock will be based on several variables, not on any single one such as a short sales signal. However, if one is…
