Are Japanese short sellers information detectives?

• Using Japanese market data, we examine whether short sales are informed trades.
• We find that short sales increase when temporary returns are higher.
• Short sales take advantage of current overvaluation of stock market prices.

Using Japanese long sample data, we examine whether short sales are informed trades about future stock returns, whether they contribute to future lower stock prices, and whether short sales are related to overvaluation of the market. We find that short interests do not cause lower future stock market returns permanently. However, we find that short interest not only responds to a past temporary decline in returns but also anticipates and contributes to future temporary changes in returns—a decline in the short run but an increase in the long run. Further, Japanese short sales tend to take advantage of current overvaluation.