Bridge over ocean
1 January 1994 Financial Analysts Journal Volume 50, Issue 1

Short Selling and Common Stock Prices

  1. J. Randall Woolridge
  2. Amy Dickinson
An analysis of overall market data and of individual companies traded on the NYSE, Amex and OTC markets indicates a positive but statistically insignificant relation between changes in short position and stock prices (even after accounting for market movements and risk). Short sellers, on average, do not earn abnormal returns. Furthermore, the relation between short selling and stock price does not seem to be materially affected by whether the stock is traded on the NYSE or Amex or over the counter. The results provide strong evidence refuting the popular notion that short sellers earn abnormal profits at the expense of less informed traders. Short sellers do not appear to drive prices down through their short sales. In fact, if anything, short sellers provide market liquidity by shorting into up markets and reducing short positions in down markets.
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