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Supply and Demand Shifts in the Shorting Market

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  • Cohen, Lauren

    (U of Chicago)

  • Diether, Karl B.

    (Ohio State U)

  • Malloy, Christopher J.

    (London Business School)

Abstract

Using proprietary data on stock loan fees and stock loan quantities from a large institutional investor, we clarify the nature of the correlation between shorting indicators and stock prices. Employing a unique identification strategy, we are able to isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns. The magnitude of this effect is large: an increase in shorting demand leads to a significant negative average abnormal return of 2.52% in the following month. We also provide evidence of a causal link between shorting demand and future stock returns by showing that these results are unlikely to be driven by public information flow.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2005/2005-8.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2005-8.

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Date of creation: Feb 2005
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Handle: RePEc:ecl:ohidic:2005-8

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  1. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
  2. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
  3. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  4. Dechow, Patricia M. & Hutton, Amy P. & Meulbroek, Lisa & Sloan, Richard G., 2001. "Short-sellers, fundamental analysis, and stock returns," Journal of Financial Economics, Elsevier, vol. 61(1), pages 77-106, July.
  5. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
  6. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
  7. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  8. Asquith, Paul & Pathak, Parag A. & Ritter, Jay R., 2005. "Short interest, institutional ownership, and stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 243-276, November.
  9. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
  10. Christoffersen, Susan E. K. & Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2003. "The Limits to Dividend Arbitrage: Implications for Cross-Border Investment," Working Papers 03-2, University of Pennsylvania, Wharton School, Weiss Center.
  11. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
  12. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 271-306.
  13. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
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