Jesse Blocher, Joseph Engelberg, Adam V. Reed
SSRN Working Paper
Publication year: 2011

We identify a setting in which there is a predictable incentive for short sellers to manipulate prices, and we find patterns consistent with short sellers manipulating prices. Specifically, we find that stocks with high short interest experience abnormally low returns on the last trading day of the year.  This effect is strongest (1) among stocks that are easily manipulated and (2) during the last hour of trading. This effect reverses at the beginning of the year, consistent with the temporary nature of price manipulation. We show that hedge funds’ portfolios are closely related to market-wide short interest, suggesting that hedge funds, with their convex compensation structures, may generate the patterns we observe.

  • Presented at 2012 American Finance Association meetings in Chicago, IL.
  • Winner of 2010 BNP Paribas Hedge Fund Center at Singapore Management University research award.
  • The authors thank Jeffrey Smith, George Aragon, Sreedhar Bharath, Jennifer Conrad, Pab Jotikasthira, David Musto, David Ravenscraft, Matt Ringgenberg for useful comments.