Shorting a stock prior to a split

Discussion in 'Strategy Development' started by david666, Aug 8, 2010.

  1. I ask this for those who have more experience, but my question is what happens when you short a stock a week or two before the split, and does anyone have experience in this area. I know you get whatever the split is, but rarely will the price go to the ratio.

    For example, say you were short BIDU at 700 the stock split comes and it drops to 64-65. And then rallies from there. If you covered at the bottom ud be up total $50 or (10 shares at $5 a share from your one share at 700). Which is fine, but it seems you could have profited more if the stock stayed at 700.
     
  2. Abstract:
    We test information-, liquidity-, and catering-related theories for the abnormal returns around stock split announcements. While recent research focuses on liquidity and catering theories, our evidence is mostly consistent with information. Analysts revise earnings forecasts by 2-3% around split announcements, and splitting firms experience less mean reversion in earnings growth than matched firms. The analyst revision and abnormal returns are larger for firms for which there is otherwise less information, as measured by fewer analysts. We also find evidence on splitting activity and the market reaction to split announcements that is inconsistent with liquidity-based theories and mixed with respect to catering.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1027543
     
  3. One more thing. You can google Owen Lamont. He has quite a few studies on short selling. He does address splits and short selling, then you can draw your own conclusions.