Short Interest as a Signal to Issue Equity

Don M. Autore, Dominique Gehy, Danling Jiang
2012 Social Science Research Network  
Do managers use information provided by the short interest in their firm's stock to time their seasoned equity offers (SEOs)? We provide evidence that the firm-specific level of short interest significantly predicts the likelihood of SEO issuance and offer size. The economic effect of short interest is large in relation to many well-known determinants of SEO activity. In our tests, we use lagged measures of short interest to eliminate the possibility that our results are driven by information
more » ... en by information leakage of an upcoming SEO. We further demonstrate that the predictive ability of short interest is not caused by short sellers reacting to insider sales prior to SEOs; in fact, it appears that insider sales follow short interest, not vice versa, and that insider sales are more profitable in the presence of high short interest. Finally, we provide direct evidence that high past short interest predicts low stock returns. Together, the evidence is most consistent with the hypothesis that high short interest signals that stock overvaluation has been discovered by sophisticated investors, and managers react by conducting SEOs while there remains a window of opportunity for issuance.
doi:10.2139/ssrn.1988994 fatcat:rwmktemewncbrfjrw6ypd6nxeu