Journal of Banking & Finance Vol. 190 2026
Digesting the profitability and investment premiums: Evidence from short-selling activity
Abstract
Conventionally, it is very difficult to differentiate factor risk premium from mispricing. Motivated by the fact that short-sellers take advantage of observable mispricing, this paper highlights the different effects of short selling activity on the profitability and investment premia. We find that the profitability premium disappears among the stocks with high short selling activity whereas short selling has no impact on the investment premium. We also show that the profitability premium is more likely than the investment premium to be associated with the sentiment-driven mispricing, which is eliminated among heavily shorted stocks. Collectively, our results suggest that the two new premia have different underlying attributions. While the profitability premium is more consistent with the mispricing interpretation, the investment premium is not.
- DOI
- 10.1016/j.jbankfin.2026.107773
- Volume
- 190
- Pages
- 107773
- Language
- en
- Sources
- openalex crossref semanticscholar