Short selling efficiency (SSE), measured each month by the slope coefficient of cross-sectionally regressing abnormal short interest on a mispricing score, significantly and negatively predicts stock market returns both in-sample and out-of-sample, suggesting that mispricing gets corrected after short sales are executed on the right stocks. We show conceptually and empirically that SSE has favorable predictive ability over aggregate short interest, as SSE reduces the effect of noises in short interest and better captures the amount of aggregate short selling capital devoted to overpricing. The predictive power is stronger during the periods of recession, high volatility, and low public information. In addition, low SSE precedes the months when the CAPM performs well and signals an efficient market. Overall, our evidence highlights the importance of the disposition of short sales in stock markets.

The SEC requires public companies to disclose material information on Form 8-K within four days of a triggering event. We show that on 8-K event and filing dates, there is significant abnormal attention on Bloomberg terminals, which are a source of information for institutional investors, while traditional media attention tends to be higher on filing days. Significant price discovery occurs on the event date and on the days between that day and the filing date. The traditional media coverage on the filing day appears to attract the attention of retail investors and leads to further price changes in the direction of the pre-filing day price change. Institutional investors exploit this price pressure via opportunistic liquidity provision. Overall, our evidence suggests that the Form 8-K filing may have little direct informational benefit, particularly to retail investors.