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Strategic Trading As a Response to Short Sellers

Author

Listed:
  • Marco Di Maggio

    (Harvard Business School; National Bureau of Economic Research (NBER))

  • Francesco A. Franzoni

    (USI Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

  • Massimo Massa

    (INSEAD - Finance)

  • Roberto Tubaldi

    (USI Lugano; Swiss Finance Institute)

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.

Suggested Citation

  • Marco Di Maggio & Francesco A. Franzoni & Massimo Massa & Roberto Tubaldi, 2019. "Strategic Trading As a Response to Short Sellers," Swiss Finance Institute Research Paper Series 19-23, Swiss Finance Institute, revised May 2019.
    • Handle: RePEc:chf:rpseri:rp1923
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    More about this item

    Keywords

    Short selling; Informed trading; Strategic traders; Institutional Investors; Market efficiency;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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