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Supply and Demand Shifts in the Shorting Market

Authors

  • LAUREN COHEN,

  • KARL B. DIETHER,

  • CHRISTOPHER J. MALLOY

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    • Lauren Cohen is at the Yale School of Management; Karl B. Diether is at the Fisher College of Business, Ohio State University; and Christopher J. Malloy is at London Business School. We thank for helpful comments and suggestions Viral Acharya, Nick Barberis, Ron Bird, Menachem Brenner, John Cochrane, Doug Diamond, James Dow, Darrell Duffie, Gene Fama, Julian Franks, Ken French, Francisco Gomes, Tyler Henry, David Hirshleifer, Kewei Hou, Charles Jones, Andrew Karolyi, Owen Lamont, Paul Marsh, Toby Moskowitz, Yigal Newman, Ľuboš Pástor, Jay Ritter, Jeanne Sinquefield, Rob Stambaugh, Jeremy Stein, Ralph Walkling, Ingrid Werner, Karen Wruck, an anonymous referee, and seminar participants at the National Bureau of Economic Research, Western Finance Association, European Finance Association, Berkeley, University of Chicago, Harvard Business School, London Business School, Northwestern, Ohio State, Stanford, and Washington University. We also thank Gene Fama and Ken French for generously providing data.

ABSTRACT

Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.

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