Geographic Proximity in Short Selling

Abstract

Micro-level geographic proximity is associated with significantly higher returns from short selling within London. Short trades by institutions near the target headquarters are followed by larger negative abnormal returns. Proximity matters more for stocks that are small, volatile, and have less sellside analyst coverage, as well as for stocks with low market correlations and inefficient prices. Funds exhibiting larger effect of proximity are smaller and have higher returns and higher idiosyncratic volatility. The relationship between distance and short returns is weaker during the COVID-19 pandemic. Short trades are correlated geographically, with proximate institutions more likely to short the same stocks.

Keywords: short selling, geography, information, investor performance, hedge funds

JEL Classification: D82, G12, G14, G15, G23