Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements

Hemang Desai, Srinivasan Krishnamurthy, Kumar Venkataraman
2004 Social Science Research Network  
We argue that stocks with high short interest (RSI) have negative alphas because they are a hedge against expected aggregate volatility. Consistent with this argument, we show that these stocks have high firm-specific uncertainty and real options, and the ICAPM with the aggregate volatility risk factor can explain the high RSI effect. The key mechanism is that high RSI firms have abundant growth options and, all else equal, growth options become less sensitive to the underlying asset value and
more » ... ore valuable as idiosyncratic volatility goes up. Idiosyncratic volatility usually increases together with aggregate volatility, i.e., in recessions.
doi:10.2139/ssrn.633283 fatcat:wdckke4eqjgjxa2ev2madlo3lu