Tyler J. Brough

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

An Examination of Short-Selling Activity Surrounding Auditor Changes

485.77 and

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

585.65 in TARP support.

Short Selling After Hours

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.

Is the Trading of Inverse ETFs a Bearish Signal

Prior work contends that informed short sellers do not stealth trade because the uptick rule produces “execution uncertainty” and does not afford short sellers the opportunity to spread their trades across time. Contrary to this idea, our results show that informed short sellers tend to use larger trade sizes, instead smaller trade sizes, after the suspension of the uptick rule. Further, we find that the use of smaller short sales during the post-suspension period, which is documented in prior studies, is not a result of greater stealth-trading activity and is instead explained by a reduction in liquidity that occurs when the uptick rule is suspended.

Concentrated short‐selling activity: bear raids or contrarian trading?

Diether, Lee, and Werner (2009) show that, in general, short sellers are contrarian in both contemporaneous and past returns and able to impressively predict future returns. This study examines these trading characteristics during both the trading day and the after-hours period. Interestingly, we find short sellers are less contrarian during the after-hours period. However, the return predictability contained in short sales is nearly five times less during after-hours trading than during regular trading hours. These results indicate that higher levels of information asymmetry and price discovery during the after-hours period (Barclay & Hendershott, 2003, 2004) are not driven by the trading of after-hour short sellers.

Options and Market Friction

In this study, we examine the trading activity of inverse ETFs in an attempt to explain whether inverse ETF volume contains bearish information about future market prices. Our two main results are, first, inverse ETF trading activity occurs after periods of negative returns suggesting that traders of those funds are not contrarian traders and are instead momentum traders. Second, we find that inverse ETF trading activity does not contain any predictive ability about future index price movements. Combined with our first finding, the second result indicates that there is little, if any, information contained in the trading of inverse ETFs. These conclusions hold when we condition on whether the ETF is leveraged and unleveraged.

Bear Raids by Short Sellers

Purpose - The purpose of this paper is to investigate what is denoted as episodes of concentrated short-selling activity, or consecutive days of abnormal short-sale activity in a particular stock. The motivation to do so is two fold. First, US regulators and regulators in other countries have restricted short selling in order to protect the integrity of markets. Second, there is some conflicting academic research determining whether short sellers are manipulative in nature. Design/methodology/approach - After defining these episodes by concentrated short selling, the paper examines returns before and after to determine whether these episodes target struggling stocks and whether these episodes predict negative returns. Findings - Contrary to the argument that episodes of concentrated shorting activity target struggling stocks, it is found that these episodes follow periods of positive returns. Further, it is found that abnormal volatility and high trading volume also predict the occurrence of these episodes. These results suggest that concentrated shorting occurs in stocks that are increasing in price during periods of heterogeneity among investors expectations (Berkman Originality/value - The results from this study have important regulatory implications as well as implications regarding the informational efficiency of stock prices.

Throwing in the Towel: When Short Sellers Fail-to-Deliver Price Reversals

In this study we test whether the introduction of options decreases market friction using the Hou and Moskowitz (2006) measure of price delay. Consistent with theory in Ross (1976), we find that the availability of options increases the flow of market-wide information into stock prices. Indeed, we find that option trading activity drives the increase in the flow of information as post-listing option volume relates negatively with price delay. In additional tests, we find that delay’s return premium, documented in Hou and Moskowitz (2006), markedly decreases after options list and is further decreasing in the level of post-listing option volume. Our findings indirectly fail to find support for the argument that introducing speculation into markets, via options, destabilizes prices (Hart and Kreps, 1986; and Stein, 1987).

The Substitutability between Short Sales and Bearish-Option Activity

In this paper, we examine bear raids by short sellers, which are defined as consecutive days of abnormal short-selling activity in a particular stock. Interestingly, we find that raids by short sellers occur after periods of positive returns instead of periods of negative returns suggesting that these types of raids do not target poor-performing stocks. Further, we find that raids occur after periods of abnormal volatility and trading activity. If volatility and trading volume approximate investors’ uncertainty (Berkman et al., 2009), then bear raids appear to target stocks that are increasing in price during periods of uncertainty about the stocks’ underlying value. This result is consistent with the theoretical implications in Miller (1977). Our final set of tests show that bear raids by short sellers impressively predict when prices reverse as returns become significantly negative the day after the raid ends.