Supply and Demand Shifts in the Shorting Market
49 Pages Posted: 8 Jul 2005 Last revised: 5 Apr 2016
Date Written: June 4, 2005
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: Suggested Citation