Does High Short Interest Lead Underperformance?

Abstract

A popular opinion among investors is that a heavily shorted stock is a prime candidate for an upward move since short-sellers will ultimately unwind their positions and purchase the stock. The authors find the reverse; high short interest on the Nasdaq leads underperformance. They believe investors are not fully using published short sales data in their investment choices and that confusion exists over the use of the data. They suggest that investors who intentionally ignore short-selling data may do so at some peril.