Strategic Trading As a Response to Short Sellers
53 Pages Posted: 5 Apr 2019 Last revised: 27 Jan 2020
Date Written: January 17, 2020
We study empirically whether informed traders’ reaction to the presence of short sellers affects price discovery. We find a sizeable reduction of positive information impounding before earnings announcements for stocks more exposed to exogenous variation in the threat of short selling. Consistent with strategic behavior by informed investors, we show that investors with positive views on a stock slow down their trades when short sellers are present in the same stock. Furthermore, they break up their buy trades across multiple brokers, suggesting that they wish to prevent their information from leaking. The findings suggest that short selling can deter information impounding when information is spread across several investors.
Keywords: Short selling, Informed trading, Strategic traders, Institutional investors, Market efficiency
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation