OWNERSHIP STRUCTURE, EXPECTATIONS, AND SHORT SALES ON THE NASDAQ

Journal of Economics and Finance, Spring 2007 by Graham, J Edward, Hughen, J Christopher

Table 1 reveals that short-selling in our sample grows over time. Average short interest ratios and bid-ask spreads, a proxy for the costliness of short selling, are illustrated for the sample period in Figure 1. This graph reveals that short-selling activity increases as one of the costs of short selling falls. Figure 1 illustrates one motivation behind our study, to discover how differing shortselling costs affect the level of short interest, and how to interpret the short-selling activity as a signal of future returns. The mean (median) short interest ratio increases from 2.23% (0.76%) at the beginning of our sample period to 4.31% (3.05%) in 1998. The median short interest ratio increases for every year during our sample period except 1998.

Table 2A provides summary statistics. Using data on short sales provided by Nasdaq, the mean (median) short interest ratio over our sample period is 3.55% (1.93%). We gather data from the Center for Research in security Prices (CRSP) on stock prices, trading volume, spreads, and market makers. The mean share price is $33.48, and daily trading volume averages 780,967 shares. The mean (median) market capitalization of the companies in our sample is $2.68 billion ($1.07 billion). Bid-ask spread data shows absolute spreads that average around $0.37 or 1.3% of the typical firm's stock price (shown as the relative spread). The mean standard deviation of returns, which is calculated using daily data from 25 days to five days before the monthly release of short interest data, is 2.98%. On average, 25 market makers facilitate the trading in each stock in our sample.

Analyst data used in our research is provided by the Institutional Brokers Estimate System (I/B/E/S). The average company in our sample has 11 analysts following its stock. The median analyst estimate of the long-term growth rate for earnings averages 22.41% and has a standard deviation of 5.08%. The price-to-book and price-to-earnings ratios are constructed using CRSP data and accounting information from Compustat.5 The average company in our sample trades for over seven times its book value and around 31 times its most recent earnings. We also calculate the dividend yield for our sample. Most companies do not pay a dividend, and the mean ratio of dividend to price is 0.04%.

Annual ownership data is provided by Compaq Disclosure. For the 200 largest Nasdaq firms, the average institutional and inside ownership are 51.63% and 19.33%, respectively. Using the monthly Standard & Poor's Stock Guides, we determine which of the stocks in our sample have exchange-traded options. Over 81% of the monthly observations in our sample are for stocks with listed options. The final row in Table 2A contains the percentage of monthly observations that occur immediately before a conversion of a convertible bond. This information is gathered by using the Standard & Poor's Bond Guide to get a list of convertible bonds that had "privileges changing and/or expiring."6

Correlation data are provided in Table 2B. These correlation coefficients, between the selected explanatory factors, the relative spread and the short interest ratio, provide insights into variables contributing to the costliness of short selling, and the level of short sales. The insignificant correlations between the convertible bond conversion factor and the short interest ratio derive largely from the low number of conversions in our sample. Other signs and significances of the variables are generally as expected.