Strategic Trading As a Response to Short Sellers
78 Pages Posted: 5 Apr 2019 Last revised: 18 Feb 2021
Date Written: January 17, 2020
We study whether short selling deters the incorporation of positive information. We find a sizeable reduction of positive information impounding before earnings announcements for stocks more exposed to short selling. The price pressure of short sales cannot explain this effect. Rather, we find that investors with positive views slow down their trades when short sellers are also present, consistent with strategic behavior. Furthermore, they break up their buy trades across multiple brokers, suggesting they wish to prevent their information from leaking. The findings suggest that short sellers hinder price discovery when better-informed investors are present in the market.
Keywords: Short selling, Informed trading, Strategic traders, Institutional investors, Market efficiency
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation