Strategic Trading as a Response to Short Sellers

60 Pages Posted: 30 Jul 2019

See all articles by Marco Di Maggio

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Massimo Massa

INSEAD - Finance

Roberto Tubaldi

BI Norwegian Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 2019

Abstract

We study empirically informed traders' reaction to the presence of short sellers in the market. We find that investors with positive views on a stock strategically slow down their trades when short sellers are present in the same stock. Moreover, they purchase larger amounts to take advantage of the price decline induced by short sellers. Furthermore, they break up their buy trades across multiple brokers, suggesting that they wish to hide from the short sellers. This behavior may impact price discovery, as we find a sizeable reduction of positive information impounding for stocks more exposed to short selling during information sensitive periods. The evidence is confirmed exploiting exogenous variation in short interest provided by the Reg SHO Pilot Program. The findings have relevance for the regulatory debate on the market impact of short selling.

Keywords: Informed trading, institutional investors, Market Efficiency, Short selling, Strategic traders

JEL Classification: G30, M41

Suggested Citation

Di Maggio, Marco and Franzoni, Francesco A. and Massa, Massimo and Tubaldi, Roberto, Strategic Trading as a Response to Short Sellers (June 2019). CEPR Discussion Paper No. DP13812, Available at SSRN: https://ssrn.com/abstract=3428332

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Soldiers Field
Baker Library 265
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Roberto Tubaldi

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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