Informed Trading Before Analyst Downgrades: Evidence From Short Sellers

This paper studies short-selling prior to the release of analyst downgrades in a sample of 670 downgrades of NASDAQ stocks between 2000 and 2001. The authors document abnormal levels of short-selling in the three days before downgrades are publicly announced. Further, they show that this pre-announcement abnormal short-selling is significantly related to the subsequent share price reaction to the downgrade, and especially so for downgrades that prompt the most substantial price declines. Their findings are robust to various controls that might also affect short-selling such as pre-announcement momentum, three-day pre-announcement returns, and the announcement-day share price.