Bastian von Beschwitz

Biased Shorts: Stock Market Implications of Short Sellers' Disposition Effect

We investigate whether short sellers are subject to the disposition effect using a novel dataset that allows to identify the weekly closing of short positions. Consistent with the disposition effect, the closing of short sale positions is strongly related to a proxy of Shortsale Capital Gains Overhang (SCGO). Furthermore, while short sellers in general exhibit skill in closing their positions – i.e. closing is followed by positive stock returns – the closing explained by SCGO is followed by negative returns. This suggests that the trades are irrational and caused by the disposition effect. Next, we study the implications of short sellers’ disposition effect on stock prices. We provide evidence that SCGO is negatively related to future stock returns. This effect exists after controlling for the standard effect of capital gains overhang of other market participants. A trading strategy based on SCGO achieves yearly three-factor alphas of up to 26%. Overall, our results suggest that short sellers, instead of arbitraging away the mispricing caused by the disposition effect of the other market participants, add to this mispricing due to their own behavioral biases.

Why Do Short Sellers Like Qualitative News

Short sellers trade more on days with qualitative news--i.e. news containing fewer numbers. We show that this behavior is not informationally motivated but can be explained by short sellers exploiting higher liquidity on such days. We document that liquidity and noise trading increase in the presence of qualitative news thus enabling short sellers to better disguise their informed trades. Natural experiments support our findings. For example, qualitative news has a bigger effect on short sellers trading after a decrease in liquidity following a stocks deletion from S&P 500 and a lower effect when investor attention is distracted by the Olympic Games.

Banks' Equity Stakes and Lending: Evidence from a Tax Reform

Several papers find a positive association between a banks equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. Thus, our findings suggest that the prior evidence cannot be interpreted causally and that banks equity stakes are immaterial for their lending.

Are Euro-Area Corporate Bond Markets Irrelevant? The Effect of Bond Market Access on Investment

We compare how bond market access affects firms’ investment decisions in the United States and the euro area. Having a bond rating enables US corporations to invest more and undertake more acquisitions. In contrast, in the euro area, bond ratings have no effect on investment decisions. Similarly, firms with bond ratings have higher leverage in the United States, but not in the euro area. This difference may be due to euro-area firms getting sufficient financing from banks. Consistent with this explanation, euro-area bond ratings became more relevant for investment after the banking crisis of 2008, when banks reduced their lending to firms.

Biased Shorts: Short Sellers' Disposition Effect and Limits to Arbitrage

We investigate whether short sellers are subject to the disposition effect using a novel dataset that allows to identify the closing of short positions. Consistent with the disposition effect, short sellers are more likely to close a position the higher their capital gains. Furthermore, stocks with high short sale capital gains experience negative returns, suggesting that their disposition effect has an effect on stock prices. A trading strategy based on this finding achieves significant three-factor alphas. Overall, short sellers’ behavioral biases limit their ability to arbitrage away the mispricing caused by the disposition effect of other market participants.

First to 'Read' the News: News Analytics and High Frequency Trading

We investigate whether providers of news analytics affect the stock market. We exploit a unique identification strategy based on revisions between different product releases of a major provider of news analytics. We document a causal effect of news analytics on the market, irrespective of the informational content of the news. Coverage in news analytics speeds up the market reaction in terms of stock price response and trading volume, but temporarily increases illiquidity and can result in temporary price distortions that might increase volatility and reduce market stability. Furthermore, we document that traders learn dynamically about the precision of news analytics.

Trading on Fluffy News: The Effect of Information Tangibility on Short Sellers’ Behavior

We investigate how short sellers strategically exploit the liquidity generated by the arrival of ambiguous information – i.e. information likely to cause disagreement in interpretation. Using a sample of newspaper articles, media newswires, and press releases, we construct a measure of information tangibility as the ratio of numbers to the total words in an article. First, we show that noise trading increases in the presence of “fluffy” news – i.e. news which has little numerical content. Measures of stock liquidity increase and the news-day return mean-reverts more on days with intangible news releases. Second, we find that short sellers exploit this increase in noise trading to place their informed trades. Moreover, intangibility has a bigger effect on short sellers’ trading after an exogenous decrease in liquidity following a deletion of the stock from the S&P 500 index. At the same time, it has a lower effect when investor attention is more distracted otherwise – e.g. during significant sporting events. We rule out the alternative explanation of short sellers’ superior ability to interpret qualitative news by showing that their trades on days with such news do not predict future stock returns better. Overall, our results indicate that short sellers exploit additional liquidity around media events to place their informed trades.