Equity Borrowing Constraints and the Informed Trading Strategies of Short Sellers

Abstract

Informed investors have been shown to break up their larger trades into smaller trades in order to disguise their information. This study considers informed trading strategies when investors face borrowing constraints. Borrowing constraints may induce more intense trading and increase the use of unusually large trade sizes. Using data consisting of short sales, we test this assertion empirically. Following prior work that documents that short sales contain information about future stock prices, we show that the most informed (return predictive) short sales are driven primarily by large short sales in stocks with higher equity borrowing constraints.

Keywords: Short selling, borrowing constraints, trading