Short Selling and Asset Values

Question A:

Allowing short selling of financial securities, such as stocks and government bonds, leads to prices that, on average, are closer to their fundamental values.

Responses weighted by each expert's confidence

Question B:

When short sellers start to establish substantial short positions in a stock, the stock is likely to have been overvalued.

Responses weighted by each expert's confidence

Question C:

Requiring investors to disclose short positions in a stock at the equivalent threshold as they are required to do for long positions would improve the informativeness of stock prices.

Responses weighted by each expert's confidence

Question A Participant Responses

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Strongly Agree
8
Bio/Vote History
If short selling is impossible or expensive, prices are set by the most optimistic investors and tend to exceed fundamental value at times of strong disagreement.
Cochrane
John Cochrane
Hoover Institution Stanford
Strongly Agree
10
Bio/Vote History
Some of the most convincing evidence of "overpricing" occurs when short sales are impeded.
-see background information here
-see background information here
Cornelli
Francesca Cornelli
Northwestern Kellogg
Strongly Agree
1
Bio/Vote History
Diamond
Douglas Diamond
Chicago Booth
Agree
7
Bio/Vote History
Allowing short sales allows those who believe that a security is overvalued to reduce their he price. Because this is somewhat costly and difficult, only those with quite negative information will chose to short based on information.
-see background information here
Du
Wenxin Du
HBS
Agree
8
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Strongly Agree
10
Bio/Vote History
When each investor's demand function is constrained below at zero, the total demand function is shifted upward, which moves the clearing about its "fundamental" price, which is the efficient market price with no such constraint.
Eberly
Janice Eberly
Northwestern Kellogg Did Not Answer Bio/Vote History
Fama
Eugene Fama
Chicago Booth
Agree
10
Bio/Vote History
Gabaix
Xavier Gabaix
Harvard
Strongly Agree
8
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Uncertain
9
Bio/Vote History
Graham
John Graham
Duke Fuqua
Agree
8
Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
Strongly Agree
8
Bio/Vote History
Banning short selling reduces liquidity and as well as price discovery as a segment of the market (those that believe the price is above fundamental value) are excluded from the market.
Hirshleifer
David Hirshleifer
USC
Strongly Agree
9
Bio/Vote History
Hong
Harrison Hong
Columbia
Agree
9
Bio/Vote History
Jiang
Wei Jiang
Emory Goizueta
Strongly Agree
8
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Strongly Agree
9
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Strongly Agree
9
Bio/Vote History
Koijen
Ralph Koijen
Chicago Booth
Agree
4
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
Agree
6
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Strongly Agree
7
Bio/Vote History
Ludvigson
Sydney Ludvigson
NYU
Agree
6
Bio/Vote History
Maggiori
Matteo Maggiori
Stanford GSB
Strongly Agree
7
Bio/Vote History
While it is possible that enhanced speculative activity might cause distortions (especially in the short run and during a crisis), overall the first order effect is to get closer to fundamentals on average
Matvos
Gregor Matvos
Northwestern Kellogg Did Not Answer Bio/Vote History
Moskowitz
Tobias Moskowitz
Yale School of Management
Strongly Agree
10
Bio/Vote History
Allowing investors to express negative information through shorting makes prices more efficient. Restrictiions on trading (buys or sells) do the opposite.
Nagel
Stefan Nagel
Chicago Booth
Strongly Agree
9
Bio/Vote History
Parker
Jonathan Parker
MIT Sloan
Agree
8
Bio/Vote History
Markets aggregate information and opinions when all investors can freely trade. Costs to shorting individual stocks implies that negative information or opinions have less impact on prices that positive information.
-see background information here
Parlour
Christine Parlour
Berkeley Haas Did Not Answer Bio/Vote History
Philippon
Thomas Philippon
NYU Stern
Agree
8
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Strongly Agree
7
Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
Agree
9
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg
Agree
8
Bio/Vote History
Short sellers add liquidity and help bring their prices closer to their true value.
Seru
Amit Seru
Stanford GSB
Agree
5
Bio/Vote History
Stambaugh
Robert Stambaugh
UPenn Wharton
Agree
8
Bio/Vote History
Starks
Laura Starks
UT Austin McCombs
Agree
8
Bio/Vote History
Although there may be occasional exceptions (e.g., meme stocks), short-selling is usually an important mechanism for market equilibrium.
Stein
Jeremy Stein
Harvard
Strongly Agree
8
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern
Agree
5
Bio/Vote History
Sufi
Amir Sufi
Chicago Booth Did Not Answer Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Strongly Agree
9
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Strongly Agree
7
Bio/Vote History
Short sales are essential for negative information to be expressed and impounded into prices. It is an essential mechanism for overpricing to be corrected.
-see background information here
Whited
Toni Whited
UMich Ross School
Strongly Agree
8
Bio/Vote History

Question B Participant Responses

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Agree
7
Bio/Vote History
Short sellers are typically among the more informed and sophisticated investors in the market, and their positions reflect reasonable (although not perfect) forecasts of future returns given prices at the time they establish their shorts.
Cochrane
John Cochrane
Hoover Institution Stanford
Agree
7
Bio/Vote History
When stocks are overvalued, shorts try to pile in, though they often can't (which is why the stock got overvalued). Shorts sometimes pile in for other reasons. -- wide dispersion of opinion, lots of uncertainty. Badly worded question.
Cornelli
Francesca Cornelli
Northwestern Kellogg
Uncertain
1
Bio/Vote History
Diamond
Douglas Diamond
Chicago Booth
Agree
8
Bio/Vote History
Du
Wenxin Du
HBS
Disagree
7
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Uncertain
10
Bio/Vote History
Maybe, instead, it had been "correctly" valued based on prior market conditions, and then a big new divergence in investor information caused big differences beliefs, causing a lot of shorting by pessimists and a new "correct" price that reflects the new cross-section of beliefs.
Eberly
Janice Eberly
Northwestern Kellogg Did Not Answer Bio/Vote History
Fama
Eugene Fama
Chicago Booth
Agree
7
Bio/Vote History
Gabaix
Xavier Gabaix
Harvard
Agree
8
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Uncertain
9
Bio/Vote History
Graham
John Graham
Duke Fuqua
Agree
8
Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
Agree
8
Bio/Vote History
The short seller believes the stock is overvalued. As for whether this is true on average, many hedge funds use some version of short-interest as a signal.
Hirshleifer
David Hirshleifer
USC
Strongly Agree
8
Bio/Vote History
Hong
Harrison Hong
Columbia
Agree
9
Bio/Vote History
Jiang
Wei Jiang
Emory Goizueta
Uncertain
8
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Agree
2
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Agree
3
Bio/Vote History
Not guaranteed and even if they are right it can take time to resolve, but often they are on to something.
Koijen
Ralph Koijen
Chicago Booth
Agree
3
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
Agree
6
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Agree
6
Bio/Vote History
Ludvigson
Sydney Ludvigson
NYU
Agree
7
Bio/Vote History
Maggiori
Matteo Maggiori
Stanford GSB
Uncertain
4
Bio/Vote History
This variation, especially at high frequency might be more about speculation. So much would depend on the frequency
Matvos
Gregor Matvos
Northwestern Kellogg Did Not Answer Bio/Vote History
Moskowitz
Tobias Moskowitz
Yale School of Management
Agree
8
Bio/Vote History
On average yes it is likely to be overvalued, but doesn’t have to be.
Nagel
Stefan Nagel
Chicago Booth
Strongly Agree
9
Bio/Vote History
See the evidence in the paper "Go Down Fighting: Short Sellers vs. Firms" by Owen Lamont in RAPS in 2012.
-see background information here
Parker
Jonathan Parker
MIT Sloan
Agree
7
Bio/Vote History
Data show lower average returns for more heavily shorted stocks, but note that the better measure is the fee associated with shorting, which reflects both the demand to short and the supply of stock that can be borrowed.
-see background information here
Parlour
Christine Parlour
Berkeley Haas Did Not Answer Bio/Vote History
Philippon
Thomas Philippon
NYU Stern
Agree
6
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Agree
6
Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
Disagree
8
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg
Agree
7
Bio/Vote History
Seru
Amit Seru
Stanford GSB
Agree
5
Bio/Vote History
Stambaugh
Robert Stambaugh
UPenn Wharton
Agree
7
Bio/Vote History
Starks
Laura Starks
UT Austin McCombs
Agree
7
Bio/Vote History
Stein
Jeremy Stein
Harvard
Agree
7
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern
Uncertain
1
Bio/Vote History
Sufi
Amir Sufi
Chicago Booth Did Not Answer Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Agree
9
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Agree
7
Bio/Vote History
short sellers seek to maximize profit by exploiting overvalued stocks. They often do so by conducting research and convincing other investors of that research.
-see background information here
Whited
Toni Whited
UMich Ross School
Uncertain
1
Bio/Vote History

Question C Participant Responses

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Uncertain
4
Bio/Vote History
If the disclosure rule reduces short-selling activity, it could have a perverse effect. The long-side rule is related to the possibility of a transfer of corporate control, which does not apply on the short side.
Cochrane
John Cochrane
Hoover Institution Stanford
Disagree
7
Bio/Vote History
Cornelli
Francesca Cornelli
Northwestern Kellogg
Agree
1
Bio/Vote History
Diamond
Douglas Diamond
Chicago Booth
Agree
6
Bio/Vote History
The possibility of short squeezes makes this a bit uncertain.
Du
Wenxin Du
HBS
Agree
6
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Uncertain
9
Bio/Vote History
Probably this is a good proposal, from an overall policy perspective. But will it make prices more informative, given that it may discourage informed pessimists from aggressively building short positions? Pete Kyle might say No. Anyway, I am uncertain.
Eberly
Janice Eberly
Northwestern Kellogg Did Not Answer Bio/Vote History
Fama
Eugene Fama
Chicago Booth
Uncertain
5
Bio/Vote History
Gabaix
Xavier Gabaix
Harvard
Agree
7
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Agree
9
Bio/Vote History
Graham
John Graham
Duke Fuqua
Uncertain
4
Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
Strongly Agree
8
Bio/Vote History
It makes no sense to me that asset managers only have to reveal large long positions but not large short positions. Data on large short positions would be important information for traders.
Hirshleifer
David Hirshleifer
USC
No Opinion
Bio/Vote History
Hong
Harrison Hong
Columbia
Uncertain
8
Bio/Vote History
Jiang
Wei Jiang
Emory Goizueta
Agree
8
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Uncertain
2
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Uncertain
3
Bio/Vote History
Koijen
Ralph Koijen
Chicago Booth
Strongly Agree
4
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
Agree
6
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Uncertain
5
Bio/Vote History
If disclosure requirements become too high, market participants are likely to employ other derivative instruments that have lower disclosure requirements
Ludvigson
Sydney Ludvigson
NYU
Agree
7
Bio/Vote History
Maggiori
Matteo Maggiori
Stanford GSB
Agree
8
Bio/Vote History
I think the shorts should be disclosed as much as the long positions
Matvos
Gregor Matvos
Northwestern Kellogg Did Not Answer Bio/Vote History
Moskowitz
Tobias Moskowitz
Yale School of Management
Strongly Agree
9
Bio/Vote History
More information transparency is helpful.
Nagel
Stefan Nagel
Chicago Booth
Uncertain
9
Bio/Vote History
Short interest is already disclosed aggregated at the stock level, and some short sellers widely broadcast when they have taken positions, so it's not clear whether there would be a further measurable gain in informativeness from disclosing investors' disaggregated positions.
Parker
Jonathan Parker
MIT Sloan
Agree
3
Bio/Vote History
Ideally disclosure requirements would apply symmetrically to deviations from the stock's share in the market portfolio. But symmetry relative to zero is probably reasonably close to optimal.
Parlour
Christine Parlour
Berkeley Haas Did Not Answer Bio/Vote History
Philippon
Thomas Philippon
NYU Stern
Uncertain
1
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Strongly Agree
8
Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
Agree
8
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg
Agree
6
Bio/Vote History
I do not see a strong argument why short positions should be treated differently from a disclosure point of view.
Seru
Amit Seru
Stanford GSB
Agree
5
Bio/Vote History
Stambaugh
Robert Stambaugh
UPenn Wharton
Uncertain
5
Bio/Vote History
Starks
Laura Starks
UT Austin McCombs
Strongly Agree
7
Bio/Vote History
Stein
Jeremy Stein
Harvard
Uncertain
4
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern
Agree
1
Bio/Vote History
Sufi
Amir Sufi
Chicago Booth Did Not Answer Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Strongly Agree
9
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Agree
6
Bio/Vote History
the mechanism through which short sellers affect prices can be made more effective with increased transparency and disclosure. It could also help reduce potential market manipulation.
Whited
Toni Whited
UMich Ross School
Strongly Agree
8
Bio/Vote History