eThesis - Kauppakorkeakoulun sähköiset gradut

In this paper, I study the informational value of short position announcements and market participants' reactions to the disclosed positions. The EU wide regulation on short selling has significantly improved the transparency and publication frequency of significant short positions. Institutional investors have expressed concerns towards the regulation, particularly regarding the observing market participants' improved ability to react to disclosures in ways that hinder the performance of the well-performing star funds in the market. This paper specifically focuses on the concerns expressed by BlackRock. By analyzing the abnormal returns and timing of position disclosures, I study if the reactions of observing markets affect the target stocks' return development and if mimicking of star funds occurs.

This study employs the short position disclosures made to the competent market authority of UK in the London Stock Exchange. As the regulatory environment came in to force in November 2012, it requires disclosure of a net short positions if the amount of shares being shorted reaches, crosses or drops below 0.5% of the company's issued share capital. Subsequently, disclosures are required on 0.1% intervals. From November 2012 to October 2014, 201 short traders disclosed positions on 327 different target stocks. Altogether, 8,917 disclosures were made. This study is based on event study methodology and employs the market model in calculating expected returns. For the degree of mimicking, I calculate the percentage of perceivably mimicked short positions of the total amount of disclosures made by a short trader.

I find no significant reactions by observing market participants that would affect the return development of target stocks. No significant publication day return reactions exist within 30 days from position disclosures. However, the mimicking activity by observing market participants is considerably high. Within 20 days from disclosures made by the 41 star funds, 60% of the disclosures by all the other short traders occur. Despite the notable mimicking behavior, the performance of the mimicked and perceivably skillful short traders is below average. Measured with 30 days subsequent to position disclosure, the average cumulative abnormal return of a target stock is -1.67%. For star funds and separately for BlackRock the figures amount to -1.08% and -0.41%. The high mimicking activity indeed proves that the concerns of star funds are legitimate as such. However, the behavior is actually the most detrimental for mimicking investors whose performance is impaired due to the mimicking of short traders who actually underperform the average short trader.