Early Movers Advantage? Evidence from Short Selling during After‐Hours on Earnings Announcement Days

• Author: Archana Jain,Christine X. Jiang,Chinmay Jain
• Published date: 01 May 2019
• DOI: http://doi.org/10.1111/fire.12174
• Date: 01 May 2019

The Financial Review 54 (2019) 235–264

Early Movers Advantage? Evidence from

Short Selling during After-Hours on

Earnings Announcement Days

Archana Jain

Rochester Institute of Technology

Chinmay Jain∗

University of Ontario Institute of Technology

Christine X. Jiang

Fudan University

Abstract

We examine short sellers’ after-hours trading (AHT) following quarterly earnings an-

nouncements released outside of the normal trading hours. Our innovation is to use the actual

short trades immediately after the announcements. We find that on these earnings announce-

ment days, there is significant shorting activity in AHT relativeto shorting activity both during

AHT on nonannouncements days and during regular trading sessions around announcements.

Short sellers who trade after-hours on announcement days earn an excess return of 0.82%

and 1.40% during before-market-open (BMO) and after-market-close (AMC)sessions, respec-

tively. The magnitude of these returns increases to 1.48 (3.92%) for BMO (AMC) earnings

announcements with negative surprise. Wefind that the reactive short selling during AHT has

∗Correspondingauthor: Faculty of Business and IT, University of Ontario Institute of Technology,Oshawa,

ON L1H 7K4, Canada; Phone: 901-652-9319; E-mail: chinmay.jain@uoit.ca.

We thank Pankaj Jain, Thomas McInish, and the discussants and participants at DePaul University,

Rochester Institute of Technology, 2015 Midwest Finance Association meeting, 2014 Eastern Finance

Association meeting, and 2013 Financial Management Association meeting for helpful comments. This

paper was previously circulated under the title “After-Hours Short Selling on Earnings Announcement

Days.” All errors are our own.

C2019 The Eastern Finance Association 235

236 A. Jain et al./The Financial Review 54 (2019) 235–264

information in predicting future returns. Short sellers’ trades have no predictive power if they

wait for the market to open to trade during regular hours. In addition, we find that the weighted

price contribution during AHT increases with an increase in after-hours short selling. Overall,

our results suggest that short sellers in AHT are informed. Our findings remain robust us-

ing alternative holding periods and after controlling for macroeconomic news announcements

during BMO sessions.

Keywords: short selling, after-hours trading, earnings announcements

JEL Classifications: G10, G12, G14

1. Introduction

Several studies haveexamined short selling behavior around earnings announce-

ments (Christophe, Ferri and Angel, 2004; Daske, Richardson and Tuna, 2005; Blau

and Pinegar, 2010; Berkman and McKenzie, 2012; Engelberg, Reed and Ringgen-

berg, 2012). Interestingly, the existing literature providesmixed evidence on the role

of short sellers around earnings announcements. While Christophe, Ferri and Angel

(2004) find that short sellers have private information and trade prior to earnings

announcements, Daske, Richardson and Tuna (2012) find no evidenceto support this

conclusion. Studying a large sample of news events(including earnings), the more re-

cent work of Engelberg, Reed and Ringgenberg (2012) finds that short sellers’ trading

advantages come mainly from their ability to analyze publicly available information.

Alexander, Peterson and Beardsley (2014) examine predictiveand reactive short sell-

ers who short, respectively, on the day before and the day after quarterly earnings

announcements and report that reactive short sellers earn significantly greater profits

than predictive short sellers do. Since short sellers are generally considered informed

agents (Boehmer, Jones and Zhang, 2008) and their trades made after news releases

are more profitable, we expect short sellers to be interested in short selling immedi-

ately after the news releases. Is there an early movers advantage and does it pay to

skip happy hours or get up early to short immediately after earnings releases? Thus

far, this is a relatively unexplored area as all aforementioned studies on short selling

around earnings announcements have only examined short selling during normal

trading hours.

Since 2005, over 90% of earnings announcements occurred during the pre-

market and after-market periods (Michaely,Rubin and Vedrashko, 2014). After-hours

trading (AHT) is the trading of listed securities outside an exchange’sspecified regular

trading hours (RTH), which in the United States are 9:30 a.m. to 4:00 p.m. (U.S.

Eastern Time). Currently,all investors can trade in either one of the two AHT sessions;

before-market-open (BMO) and after-market-close (AMC). Therefore, an important

question is how short sellers react to earnings announcements made during AHT

sessions. Although many studies have shown that short sellers are informed, some

focus on informed short on average days, such as Boehmer, Jones and Zhang (2008),