"The Informative Nature of REIT Shorting"

Abstract Using intraday shorting data collected from mandatory SEC disclosures from January 2005 through April 2007 we construct a series of tests to determine whether traders who short shares of Real Estate Investment Trusts (REITs) are informed. We find evidence that portfolios with higher shorting underperform portfolios with less shorting, suggesting informed REIT shorting. This result, however, is sensitive to how shorting is measured and whether we examine raw returns or risk-adjusted returns. Cross-sectional analysis indicates a negative relationship between short selling and subsequent returns, again suggesting informed REIT shorting. Finally, we find a positive relationship between shorting activity and volatility. To the extent that higher volatility reflects more informed trading (Durnev, Morck, Yeung and Zarowin (2003)), our result are consistent with short sellers of REITs being informed. Overall, our evidence suggests that REIT short sellers are important contributors to efficient market prices.