My dissertation studies the evolution and role of short selling activity in financial markets. My first essay examines the cross-sectional and time-series variations in the characteristics of equity lending market in the setting of IPO, where, as suggested by Duffie et al. (2002), search frictions are likely to be high. I find that the initial supply of lendable shares and short interest levels increase with offer size, while initial lending fees decrease with offer size. The initial lending fees are also positively related to the bargaining power of lenders and negatively related to the bargaining power of borrowers. The supply of lendable shares and short interest level both increase following the IPO. The growth rate in short interest over time is negatively related to time since IPO. The increase in supply of lendable shares is positively related to the public float as well as the contemporaneous and lagged changes in institutional ownership, especially for institutional investors who engage in lending and short selling. Moreover, the supply of lendable shares increases as private equity firms and venture capital investors exit the stock and the share float increases. The increase in float is accompanied by a reduction in the cost of borrowing. IPOs with high lending fees tend to have low subsequent returns, which together with the rest of the findings, provide support for the ideas in Duffie et al. (2002) and highlight the importance of search frictions in equity lending market. Using detailed daily short interest data for U.S. common stocks over the period of 2006 to 2017, my second essay examines short selling activities around earnings announcements and their impact on stocks prices. Stocks with high short interest, large changes in short interest, more covered shorts, or more new short positions prior to earnings announcements have stronger price reactions to earnings news and much weaker post-earnings-announcement drifts (PEADs). Trades by short sellers during earnings announcements are consistent with the earnings surprises as well as announcement-period returns. However, these trades do not predict post-earnings-announcement drifts. The results suggest that on average short sellers do not actively trade on earnings-related iiinews or anomalies, but their information acquisition and trading activities help improve price discovery during earnings announcements.
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Doctor of Philosophy (Ph.D.)
College of Business Administration
Business Administration; Finance
Length of Campus-only Access
Doctoral Dissertation (Open Access)
Zhao, Wanxi, "Two Essays on the Evolution and Role of Short Selling Activity in Financial Markets" (2022). Electronic Theses and Dissertations, 2020-. 1455.