How Can Bad News Increase Price? Short Squeezes After Short-Selling Attacks

52 Pages Posted: 23 May 2021 Last revised: 28 May 2021

See all articles by Lorien Stice-Lawrence

Lorien Stice-Lawrence

University of Southern California - Marshall School of Business

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting

Wuyang Zhao

University of Texas at Austin - Department of Accounting

Date Written: April 2021

Abstract

We examine market returns following short-selling attacks, where short sellers publicly disclose the negative information that led them to short their targets. Counterintuitively, we find that for a significant proportion of these attacks (about 30%), the initial market reactions are positive. Consistent with short squeezes being a major driver of these positive returns, we demonstrate that about half of initially positive returns fully reverse over the following quarter, relative to about a third of initially negative returns, and this asymmetric reversal pattern cannot be explained by short sellers profitably covering their positions, by misleading disclosures, or by market attention. Further, short covering levels are high for target firms with initially positive returns that reverse, further suggesting that price pressure from short sellers forced to close their positions explains some of these positive returns. We find that short squeezes are difficult to predict ahead of time but may be triggered by conditions on the day of the attack, including insider purchases, highlighting the difficulty short sellers face in avoiding this risk. Lastly, short squeezes impose substantial costs on short sellers, leading to an average loss of $70 million per suspected squeezed campaign relative to estimated profits of $35 million per successful campaign.

Keywords: short squeezes, short attacks, short selling, financial disclosure

Suggested Citation

Stice-Lawrence, Lorien and Wong, Yu Ting Forester and Zhao, Wuyang, How Can Bad News Increase Price? Short Squeezes After Short-Selling Attacks (April 2021). Available at SSRN: https://ssrn.com/abstract=3849581 or http://dx.doi.org/10.2139/ssrn.3849581

Lorien Stice-Lawrence (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Wuyang Zhao

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
5128262698 (Phone)

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