While some short sales are based on information or opinions about a firm's share price, this is not the case with many others. This statement coincides with the increasing use of arbitrage-related hedge fund strategies whereas it collides with public consensus that blames short sellers for decreasing stock prices and exacerbating the economic downturn. Sebastian Werner examines aggregate short sales and convertible bond arbitrage, which is a typical hedge fund strategy that involves a significant short position in the underlying stock of a long convertible bond position for hedging purposes. Focusing on events of extreme stock price changes and short selling activity, he provides insightful and new observations of the significant difference in the trading pattern, information content and resulting impact on stock returns of arbitrage- versus valuation-based short selling activities.

Autorentext
Sebastian P. Werner earned his doctoral degree from the European Business School under the supervision of Prof. Dr. Lutz Johanning and now works in equity portfolio management for a global bank based in Frankfurt.

Zusammenfassung
The main cause of financial crisis may be found in the over-optimistic investing of b- ers that leads market prices away from fundamental values. However, in the aftermath of excess when stock markets tumble, it is usually the pessimists or short sellers who get publicly blamed. Despite the longstanding controversy on short selling activities, this market instrument remains a widely misunderstood concept by the public while it is an essential tool used by hedge funds for speculation and arbitrage. That is why it is important to investigate short selling for its different motivations and the resulting effect on stock returns, a subject whose empirical study is in its infancy. In his doctoral thesis, Sebastian examines convertible bond arbitrage, which is a typical hedge fund strategy that involves a long position in a convertible bond and a significant short position in the underlying stock. The short selling is employed as a hedge against movements in the stock price. With every change in the stock price, the hedge needs to be continuously readjusted, a practice which should lead companies with convertible bonds outstanding to have on average higher short selling activity than companies without convertible bonds. Furthermore, fundamental information should be processed differently in stocks with convertible bonds as stock price reactions based on the information are accompanied by the short selling of the convertible bond arbit- geurs.

Inhalt
Background and Empirical Predictions.- The Event Study Methodology.- Data, Full Sample and Variable Construction.- Difference in Abnormal Short Selling Activity Following Events of Large Positive Stock Price Changes.- Difference in Information Content of Extreme Short Selling Activity Events and the Impact on Stock Returns.- Overall Conclusion.