Strategic Trading As a Response to Short Sellers
69 Pages Posted: 5 Apr 2019 Last revised: 8 Jun 2020
Date Written: January 17, 2020
We study empirically 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 from short selling cannot explain this effect. Rather, consistent with strategic behavior, investors with positive views slow down their trades when short sellers are also present. Furthermore, they break up their buy trades across multiple brokers, suggesting they wish to prevent their information from leaking. The findings suggest that short selling can hinder price discovery when investors receive different information signals.
Keywords: Short selling, Informed trading, Strategic traders, Institutional investors, Market efficiency
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation