Abstract
This paper investigates the informativeness of short sales on detecting firm investment inefficiency. Neoclassical and agency theory suggest that investment inefficiency destroys firm value by allocating resources to less-valued uses. This paper finds that short-sellers adjust their short positions before the announcement of a financial statement, to use their information advantage on firm investment inefficiency. The relation between the short positions in a firm and its future investment inefficiency is both statistically and economically significant, and robust to a broad set of control variables. Subsample analyses show that the informativeness of short sales positions about future investment inefficiency is concentrated on overinvestment firms, firms with little board independence, and firms with low CEO incentive pay.