Benjamin M. Blau

Short Selling and the Weekend Effect for Nyse Securities

Using short-sale transactions data, we examine the relation between short selling and the weekend effect. We do not find that short selling is more abundant on Monday than on Friday, even for stocks that have higher Friday returns. We find that short sellers execute more short sale volume during the middle of the week, and that the positive correlation between short selling and returns on Monday is greater, on average, than the correlation on the other days of the week. Our results are robust to subsamples of stocks with larger weekend effects and stocks that do not have listed options.

Short Selling during Extreme Market Movements

This study examines the short selling of NYSE stocks contained in the S&P 500 on days with extreme increases (up days) and extreme decreases (down days) in the index. Although Diether, Lee, and Werner [2009] showed, using contemporaneous returns of individual stocks, that short sellers are generally contrarian, Blau, Van Ness, Van Ness, and Wood find that short selling in stocks increases (decreases) on large down (up) days for the S&P, which suggests that during extreme market movements short sellers tend to follow the crowd. Further, the authors’ results show that short sellers do not anticipate down days, indicating that these event days are largely unforeseen. When examining the return predictability of short sellers on event days, the authors observe that short sellers on up days are significantly better at predicting negative next-day returns than short sellers on down days, suggesting that market-induced contrarian short selling is more profitable than momentum short selling.

Comparing the Information in Short Sales and Put Options

Prior work shows that both short sales and put options contain information about future stock prices. In this study, we compare the return predictability in short sales to the return predictability in put options. The motivation for this comparison is based on the theoretical argument that informed traders can choose between short sales and put options when establishing short positions in a particular stocks. Results in this paper suggest that the underperformance of stocks with high short-selling activity is approximately four times larger than the underperformance of stocks with high put-option activity. While stocks that are most likely to face binding short-sale constraints drive the underperformance caused by put-option activity, we still find that short sales are generally more informative about future prices. Copyright Springer Science+Business Media New York 2013

Signaling, Free Cash Flow and "Nonmonotonic" Dividends

Many argue that dividends signal future earnings or dispose of excess cash. Empirical support is inconclusive, potentially because no model combines both rationales. This paper does. Higher quality firms pay dividends to eliminate the free cash-flow problem, while firms that outsiders perceive as lower quality pay dividends to signal future earnings and reduce the free cash-flow problem. In equilibrium, dividends are nonmonotonic with respect to the signal observed by outsiders; the highest quality firms pay smaller dividends than lower perceived quality firms. The model reconciles the existing literature and generates new empirical predictions that are tested and supported.

Corporate Lobbying, Political Connections, and the 2008 Troubled Asset Relief Program

Political involvement has long been shown to be a profitable investment for firms that seek favorable regulatory conditions or support in times of economic distress. But how important are different types of political involvement for the timing and magnitude of political support? To answer this question, we take a comprehensive look at the lobbying expenditures and political connections of banks that were recipients of government support under the 2008 Troubled Asset Relief Program (TARP). We find that firms that lobbied or had other types of political connections were not only more likely to receive TARP funds, they also received a greater amount of support earlier than firms that were not politically involved through lobbying or direct political connections. For every dollar spent on lobbying during the five years prior to the TARP bailout, firms received between

Gambling Preferences, Options Markets, and Volatility

485.77 and

The Reaction of European Credit Default Swap Spreads to the U.S. Credit Rating Downgrade

585.65 in TARP support.

An Examination of Short-Selling Activity Surrounding Auditor Changes

This study examines whether the gambling behavior of investors affects volume and volatility in financial markets. Focusing on the options market, we find that the ratio of call option volume relative to total option volume is greatest for stocks with return distributions that resemble lotteries. Consistent with the theoretical predictions of Stein (1987), we demonstrate that gambling-motivated trading in the options market influences future spot price volatility. These results not only identify a link between lottery preferences in the stock market and the options market, but they also suggest that lottery preferences can lead to destabilized stock prices.

Short Sales, Stealth Trading, and the Suspension of the Uptick Rule

Using data consisting of Credit Default Swap (CDS) spreads, this study examines CDS spreads for nearly all European countries surrounding the August 5th, 2011 sovereign credit rating downgrade of the United States. While U.S. CDS spreads remained at relatively normal levels, we find a surge in European CDS spreads during the ten-day period surrounding the U.S. downgrade. At their highest level during this ten-day period, CDS spreads were nearly 25% higher than normal indicating that the CDS market perceived that the U.S. downgrade dramatically affected the likelihood of default in European countries. We show that European countries with the smallest GDP per capita and countries that had not recently been downgraded had the largest increase in CDS spreads. Our multivariate tests also show that countries that use the EURO also had the largest increases in CDS spreads.

Economic Freedom and Crashes in Financial Markets

Using a combination of short-selling data made available by Regulation SHO and auditor change data disclosed in companies’ SEC filings, we examine whether short sellers (a) discern between “good news” and “bad news” auditor changes and (b) increase their revenue by trading around auditor change announcements. We find that short sellers systematically increase activity following certain auditor changes, which include auditor downgrades (i.e., change from Big 4 auditor to non-Big 4 auditor), auditor resignations, and auditor changes involving a disagreement between management and the departing auditor. Our results indicate that short sellers are able to generate significant returns by systematically taking short positions pursuant to specific types of “bad news” changes.