Strategic Trading As a Response to Short Sellers

Abstract

We study whether the strategic response to short selling by other informed investors decelerates the incorporation of positive information. We find a sizeable reduction of positive information impounding before earnings announcements for stocks more exposed to short selling. Consistent with strategic behavior, we find that 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 price impact. Thus, the strategic reaction to short selling appears to have implications for information impounding before public information releases.

Keywords: Short selling, Informed trading, Strategic traders, Institutional investors, Market efficiency

JEL Classification: G12, G14, G23