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

AuthorArchana Jain,Christine X. Jiang,Chinmay Jain
Published date01 May 2019
Date01 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
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.
C2019 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),

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT