It's Fact - Short Sales Don't Drive Share Prices Down

At last - a piece of research has been published that examines the relationship between the level of short sales and adverse share prices.

Writing for the newly re-launched London-based Alternative Investment Management Association Journal, Emily Stewart has lead-authored the paper "Short Selling Impact on Australian Stock Prices". (Note: the author of this blog post is also a co-author on the paper).

One of the side benefits of the Australian Securities and Investments Commission's conservative approach, in which the ban on short selling was applied for an extended period compared to other jurisdictions, was that it delivered a rich data set of 127 observations.

Stewart collected the Gross Short Sales data that was published each day and applied her analysis to the S&P/ASX20, which represented almost 60% of total All Ordinaries market capitalisation. She was able to distinguish between the so-called financial stocks and the non-financial stocks, as the periods each were banned differed.

Stewart's results either debunk the conventional wisdom that declining share prices are associated with short selling or indicate that the Gross Short Sales data, for all the effort required to collect it, is a poor measure of the impact of short selling.