Supply and Demand Shifts in the Shorting Market

49 Pages Posted: 8 Jul 2005 Last revised: 5 Apr 2016

See all articles by Christopher J. Malloy

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER); Arrowstreet Capital, LP

Karl B. Diether

Independent

Lauren Cohen

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

Date Written: June 4, 2005

Abstract

Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.

Keywords: Short selling, stock lending, short sale constraints

JEL Classification: G1, G12

Suggested Citation

Malloy, Christopher J. and Diether, Karl B. and Cohen, Lauren, Supply and Demand Shifts in the Shorting Market (June 4, 2005). EFA 2005 Moscow Meetings Paper, Available at SSRN: https://ssrn.com/abstract=672381 or http://dx.doi.org/10.2139/ssrn.672381

Christopher J. Malloy (Contact Author)

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Karl B. Diether

Independent

Lauren Cohen

Harvard University - Business School (HBS) ( email )

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