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Do Short Sellers Trade in Anticipation of Short Interest Announcements?

In this study, we test the hypothesis that short-selling activity increases in the days leading up to scheduled short interest announcements. Consistent with the idea that short sellers can endogenously acquire information about the content in upcoming short interest announcements, we find evidence that short selling activity is abnormally high on the day before announcements, particularly for announcements with the largest short interest increases from the previous month. Using the common negative relation between current short selling and future returns as an approximation for the information contained in short sales, we find that short selling prior to short interest announcements contains greater levels of information than short selling during more-normal periods. Although short sellers are not trading on private information per se, our results indicate that they are trading on privileged information that is “less than public”. Better disclosure of short selling levels throughout the entire month may benefit traders without this privileged information.