In Search of Shares: Passive Ownership, Short Covering, and Price Efficiency

46 Pages Posted: 9 Apr 2021 Last revised: 7 Oct 2022

See all articles by Sanjeev Bhojraj

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management

Yong Yu

University of Texas at Austin

Wuyang Zhao

McGill University - Desautels Faculty of Management

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

Suggested Citation

Bhojraj, Sanjeev and Yu, Yong and Zhao, Wuyang, In Search of Shares: Passive Ownership, Short Covering, and Price Efficiency (August 12, 2024). Available at SSRN: https://ssrn.com/abstract=3811104 or http://dx.doi.org/10.2139/ssrn.3811104

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Accounting
Ithaca, NY 14853
United States
607-255-4069 (Phone)
607-254-4590 (Fax)

Yong Yu

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

Wuyang Zhao (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5

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