DP13812 Strategic Trading as a Response to Short Sellers

Author(s): Marco Di Maggio, Francesco Franzoni, Massimo Massa, Roberto Tubaldi
Publication Date: June 2019
Keyword(s): Informed trading, institutional investors, Market Efficiency, Short selling, Strategic traders
JEL(s): G30, M41
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13812

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.