Which Shorts Are Informed?

We construct a long daily panel of short sales using proprietary NYSE order data. During 2000-2004, shorting accounts for more than 12.9% of NYSE volume, suggesting that short-sale constraints are not widespread. As a group, these short sellers are quite well-informed. Heavily shorted stocks underperform lightly shorted stocks by a riskadjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional non-program short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The results indicate that, on average, short sellers are important contributors to efficient stock prices.