Short Selling and Product Market Competition

Abstract

We empirically investigate how short selling affects product market performance. We find that higher short sales of stocks lead to declines in firms' market shares. The effects are stronger in larger firms, concentrated industries, and industries where firms compete in strategic substitutes. Further results suggest that firms' competitive interactions amplify the effects of short selling on market shares via a greater sensitivity of output levels to the release of information contained in stock prices. Our findings are consistent with a managerial disciplining channel in which short interest reveals information of inefficient overreach by firms with market power, leading to downsizing and spin-offs.

Keywords: Short sales, product market competition, financial feedback, price informativeness.

JEL Classification: G14, G23, G34, D43, D82, D84.