This paper investigates the informational content of publicly available short flow. Even though daily short flow data is published in real time during 2010-2018, simple sort based on short volume ratio indicates it remains a significant predictor of negative future stock returns. Both the short term and long term short volume ratios can predict future returns and the predictability decays slowly up to one year. The results are also confirmed by Fama-MacBeth regressions. Most importantly, the abnormal short volume ratio can also predict future short term and long term returns, which indicates short sellers are trading based on short term private information. By investigating the short volume ratio around earnings announcement, we find that short volume ratio anticipates earnings n...[ Read more ]

This paper investigates the informational content of publicly available short flow. Even though daily short flow data is published in real time during 2010-2018, simple sort based on short volume ratio indicates it remains a significant predictor of negative future stock returns. Both the short term and long term short volume ratios can predict future returns and the predictability decays slowly up to one year. The results are also confirmed by Fama-MacBeth regressions. Most importantly, the abnormal short volume ratio can also predict future short term and long term returns, which indicates short sellers are trading based on short term private information. By investigating the short volume ratio around earnings announcement, we find that short volume ratio anticipates earnings news, return predictability concentrating on one day before the earnings announcement day and can predict cash flow news. Lastly, we show the abnormal short volume ratio’s return predictability also concentrates in less limits to arbitrage subsamples such as stocks being large, liquid, high institutional ownership and low idiosyncratic volatility. All these point to the fact that at least, short sellers are trading based on short term information.

Key Words— Short Flow, FINRA, Return Predictability, Market Efficiency