Informed or speculative trading? Evidence from short selling before star and non-star analysts' downgrade announcements in an emerging market

We examine informed vs. speculative trading among short sellers prior to analyst downgrades in China from March 2010 to August 2014. We do not find abnormal short selling in the days before downgrade announcements in the full sample. For the star (non-star) analyst subsample, however, we find significant (insignificant) abnormal short selling beginning 10 days prior to downgrade announcements. In addition, short sellers cut back their short positions when star analysts incorrectly upgrade. Hence, short sellers do not seem to know more than star analysts. With the timing of the short selling, our evidence indicates that star analysts might leak their research to certain short sellers before their downgrade announcements. Furthermore, we demonstrate that broker reputation and institutional investor ownership mitigate the relation between star analysts' downgrades and abnormal short selling. Our results are robust to different measures of abnormal short selling, abnormal returns, event windows, star analysts' impact, and endogeneity. Our overall findings suggest that short sellers are informed.