Short of capital: Stock Market Implications of Short Sellers’ Losses

70 Pages Posted: 11 Feb 2019 Last revised: 8 May 2023

See all articles by Antonio Gargano

Antonio Gargano

University of Houston - C.T. Bauer College of Business

Juan M. Sotes-Paladino

Universidad de los Andes, Chile

Patrick Verwijmeren

Erasmus University Rotterdam (EUR)

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

Gargano, Antonio and Sotes-Paladino, Juan M. and Verwijmeren, Patrick, Short of capital: Stock Market Implications of Short Sellers’ Losses (04 29, 2023). Available at SSRN: https://ssrn.com/abstract=3326332 or http://dx.doi.org/10.2139/ssrn.3326332

Antonio Gargano (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Juan M. Sotes-Paladino

Universidad de los Andes, Chile ( email )

Chile

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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