Short Interest as a Signal to Issue Equity

46 Pages Posted: 22 Jan 2012 Last revised: 22 May 2019

See all articles by Don M. Autore

Don M. Autore

Florida State University - College of Business

Irena Hutton

Florida State University - College of Business

Danling Jiang

College of Business, Stony Brook University

Dominique Gehy Outlaw

Hofstra University - Frank G. Zarb School of Business

Date Written: February 1, 2018

Abstract

This paper examines whether corporate managers follow the collective actions of arbitrageurs, measured by short interest, in deciding whether to conduct seasoned equity offers (SEOs). We find that short interest predicts future SEOs and has a marginal impact comparable to well-known predictors. In economic terms, the probability of an SEO announcement increases by 36% for firms in the top quintile of short interest and decreases by 61% for firms in the bottom quintile. Importantly, we identify a causal impact of short interest on SEO issuance using a novel instrument for short interest based on future litigation events that are likely known by outsiders better than by insiders. Further evidence demonstrates that high short interest leads to a share price correction in the coming months, thereby signaling to managers a closing window of opportunity to issue overpriced shares. Taken together, our findings suggest that the secondary market has a significant impact on real corporate decisions through the observed arbitrage activities of sophisticated investors.

Keywords: Real effects of arbitrage activities; short interest; seasoned equity offer; litigation; insider trading

JEL Classification: G14, G32

Suggested Citation

Autore, Don M. and Hutton, Irena and Jiang, Danling and Outlaw, Dominique Gehy, Short Interest as a Signal to Issue Equity (February 1, 2018). Journal of Corporate Finance, 2018, 48, 797-815, Available at SSRN: https://ssrn.com/abstract=1988994 or http://dx.doi.org/10.2139/ssrn.1988994

Don M. Autore

Florida State University - College of Business ( email )

821 ACADEMIC WAY, Room 314 RBA
P.O. Box 3061110
Tallahassee, FL 32306-1110
United States
850-644-7857 (Phone)

Irena Hutton

Florida State University - College of Business ( email )

821 Academic Way
Tallahassee, FL 32306-1110
United States
850.645.1520 (Phone)

Danling Jiang (Contact Author)

College of Business, Stony Brook University ( email )

306 Harriman Hall
Stony Brook, NY 11794
United States

HOME PAGE: http://sites.google.com/site/danlingjiang

Dominique Gehy Outlaw

Hofstra University - Frank G. Zarb School of Business ( email )

Hempstead, NY 11549
United States

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