In Search of Shares: Passive Ownership, Short Covering, and Price Efficiency
46 Pages Posted: 9 Apr 2021 Last revised: 7 Oct 2022
Date Written: August 12, 2024
Abstract
We examine whether passive ownership constrains short sellers’ ability to cover their positions quickly after positive earnings news and thereby exacerbates the price pressure from short covering. We find that high passive ownership is related to greater price overshooting in highly shorted stocks at positive earnings announcements. This effect arises because high passive ownership amplifies both price and volume impacts of short covering. Exploring benchmarking intensity changes around Russel index reconstitutions or examining other settings such as management guidance and analyst recommendation revisions yield similar inferences. Overall, our findings highlight a novel mechanism that passive ownership can constrain short-selling activities.
Keywords: passive ownership, short covering, earnings announcements, price pressure
JEL Classification: G12, G14, M40, M41
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