Chapter 1: Changes in Short Positions and Earnings Surprises

Our study investigates how the existence of short interest affects the Post Earnings Announcement Drift (PEAD). When extremely negative or positive earnings are announced, investors with large short positions can either cover their short positions immediately or continue to hold and/or increase their short positions. Our combined evidence show that investors typically trim down short positions after earnings announcements, regardless of the direction of the earnings surprise. Also, investors seem to increase their short positions if they had low levels of short positions, especially for firms that reported positive earnings surprises. Investors seem to behave in a manner inconsistent with the PEAD, and support an explanation that PEAD is the result of investor underreaction to earnings news.