Short of capital: Stock Market Implications of Short Sellers’ Losses
70 Pages Posted: 11 Feb 2019 Last revised: 8 May 2023
Date Written: 04 29, 2023
Abstract
We provide evidence that losses constrain short sellers but not the transmission of information to prices. Using unique data on U.S. equity lending, we document a negative impact of the mark-to-market losses of a stock's short sellers, but no impact of their gains, on the future shorting of the stock. Consistent with funding and institutional constraints limiting short selling, we further show that the effect is highly asymmetric across different loss levels and stronger among stocks facing higher margin requirements. However, loss-making short selling has no impact on price efficiency or predictive power for returns, suggesting that these constraints affect mostly uninformed shorting activity.
Keywords: Short Selling, Profits and Losses, Limits to Arbitrage, Informed Trading
JEL Classification: G12, G14
Suggested Citation: Suggested Citation