Discussion of Bargeron-Bonaime: What is revealed when firms repurchase against short selling? Ottawa, May 2017 Moqi Groen-Xu, LSE

The research question: What is revealed when firms repurchase against short selling? i.e.: how do subsequent returns look like when Changes in short interest is high (> 0.5% of shares outstanding) x firm repurchases high (> 0.5%)

The research question: What is revealed when firms repurchase against short selling? The answer: Firm information dominates: returns are positive after high-rep x high-short quarters. Trading strategy yields 7.5% abnormal returns p.a. Short sellers know this and get out after release. High-rep x high-short (“disagreement”) quarters also forecast 8Ks with higher CARs, better earnings surprises, and fewer acquisitions.

The research question: What is revealed when firms repurchase against short selling? The answer: Firm information dominates: returns are positive after high-rep x high-short quarters. The interpretation: Results confirm 2 hypotheses: 1. “Informed manager hypothesis: managers repurchase against short selling based on positive, private information.” 2. “Dominant manager hypothesis: Managers’ positive information on firm value outweighs short sellers’ negative information and any negative value implications of agency-motivated repurchases.”

The two hypotheses Can we learn more? Results confirm 2 hypotheses: 1. “Informed manager hypothesis: managers repurchase against short selling based on positive, private information.” 2. “Dominant manager hypothesis: Managers’ positive information on firm value outweighs short sellers’ negative information and any negative value implications of agency-motivated repurchases.” Can we learn more? These 2 hypotheses are the big questions and not entirely unexpected. Follow-up question: How often are managers right and when? More can be learned about “the causes and consequences”.

The research question: What is revealed when firms repurchase against short selling? Can we learn more? Paper shows: High-rep x high-short (“disagreement”) quarters also forecast 8Ks with higher CARs, better earnings surprises, and fewer acquisitions. More questions: What kind of information can firms forecast better? What kind of information can short sellers forecast better? Are there genuine cases where both don’t know? Or are firms taking advantage of wrong market information? Is there a “short-seller sentiment”?

Information processing Managers by definition have more private information. But they do not need to be correct. From the hypothesis development: Behavioral biases. Overconfidence Short sellers could have superior information processing skills. Can we look for these directly? Let’s start with the information processing Acquisitions are a good start: short sellers may know more about potential acquirers Is that true about industry news / competitor news in general? How about macro news that specific firms / industries are sensitive to? Or even more likely: upstream / downstream industries that are different? What about conglomerates? Are managers there less informed? Or R&D heavy industries / with disruptive technologies? Who is better informed here?

Can we look for these directly? Behavioral biases Managers by definition have more private information. But they do not need to be correct. From the hypothesis development: Behavioral biases. Overconfidence Short sellers could have superior information processing skills. Can we look for these directly? 8Ks are sorted by “item” and easy to classify. Are managers overconfident about any specific news? Are short sellers wrong about specific news? Product development? Financing terms? News about executives themselves? What drives the earnings surprises you find? What about other behavioral biases?

Other scenarios, other questions What about equity issuances? What about equity issuances contemporaneous with repurchases? What do we know? What do we think others know?