Working Paper: CEPR ID: DP13812
Authors: Francesco Franzoni; Marco Di Maggio; Massimo Massa; Roberto Tubaldi
Abstract: We study empirically informed traders’ reaction to the presence of short sellers in the market. We find that investors with positive views on a stock strategically slow down their trades when short sellers are present in the same stock. Moreover, they purchase larger amounts to take advantage of the price decline induced by short sellers. Furthermore, they break up their buy trades across multiple brokers, suggesting that they wish to hide from the short sellers. This behavior may impact price discovery, as we find a sizeable reduction of positive information impounding for stocks more exposed to short selling during information sensitive periods. The evidence is confirmed exploiting exogenous variation in short interest provided by the Reg SHO Pilot Program. The findings have relevance for the regulatory debate on the market impact of short selling.
Keywords: short selling; informed trading; strategic traders; institutional investors; market efficiency
JEL Codes: G30; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short sellers presence (G19) | strategic slowdown in trading by positively informed investors (G14) |
| short sellers presence (G19) | decrease in trading speed (G14) |
| short sellers activity (G14) | reduction in buying activity by positively informed investors (G14) |
| short interest elevated (G19) | decrease in positive information impounding (G14) |
| short selling (G17) | delayed trading behavior of informed investors (G14) |
| short selling (G17) | reduction in price discovery (D49) |