Summary of studies on short sales constraints and stock returns
| Authors (Year) | Research topic | Sample period/country | Major findings |
|---|---|---|---|
| Aggarwal et al. (2015) | Institutional investors and supply of lendable stock | USA: 2007–2009 | Institutional investors limit the supply of lendable stocks due to their preference for voting rights, thereby constraining short sales |
| Allen et al. (1993) | Short sales constraints and asymmetric information | Theoretical study | Short sales constraints create bubbles in stock prices |
| Asquith et al. (2005) | Institutional ownership, short interest, and stock returns | USA: 1980–2002 | Stocks with high short interest exhibit a strong and significantly negative relationship with stock returns |
| Atmaz et al. (2023) | Costly short selling and lending market | Theoretical study | A dynamic model where investors’ belief disagreement leads to higher shorting demand and predicts stock returns negatively |
| Autore et al. (2015) | Short sales constraints and stock overvaluation | USA: 2005–2008 | The authors report extreme overpricing and subsequent reversals where short sales are specially binding |
| Bai et al. (2006) | Asset prices under short-sale constraints | Theoretical study | Short-sale constraints could exert either upward or downward pressure on stock prices, contingent on the types of trades being restricted |
| Bao et al. (2019) | Short interest and disclosure of information | USA: 2001–2010 | Stocks with high residual short interest were significantly overvalued. Managers had a tendency to withhold bad news |
| Battalio and Schultz (2011) | Short sales ban and equity options market | USA: August 1, 2008–October 21, 2008 | Trading volume in the options market did not increase when short sales were banned, indicating that options availability was not a good proxy for short sales |
| Beber and Pagano (2013) | Short sales ban and stock prices | Global: January, 2008–June, 2009 | Ban on short selling reduces liquidity and slows price discovery process, but was not associated with stock returns except in the US |
| Beneish et al. (2015) | Short sellers and stock returns | USA: July, 2004–December, 2013 | Supply constraints made short sales challenging and stocks constrained by short sales subsequently underperformed |
| Boehme et al. (2006) | Short sale constraints, differences of opinion, and overvaluation | USA: January, 1988–December, 2002 | The authors used low market capitalization stocks to proxy for short-sale constraints and found that underperformance of stocks with high short interest was concentrated among stocks with low market capitalization |
| Boehmer et al. (2008) | Elimination of the uptick rule and stock prices | USA: January, 2007–August 2007 | Elimination of uptick rule increased shorting activities but did not have impact on stock prices |
| Boehmer et al. (2013) | Ban on short selling and stock returns | USA: August 1, 2008–October 31, 2008 | Although shorting activities dropped significantly there was no impact on stock prices due to the ban on short selling |
| Blau and Wade (2011) | Comparison of return predictability in short selling and in put options | USA: Risk adjusted returns of 1,186 stocks | Underperformance of short sale constrained stocks are evident but the availability of option trading reduces the impact of short sales constraints |
| Blocher et al. (2013) | Impact of equity loan market on stock prices | Theoretical study | Hard-to-borrow stocks have lower subsequent returns than other stocks, with negative returns concentrated in stocks with high heterogeneity in investor beliefs |
| Brent et al. (1990) | Short interest and subsequent stock returns | USA: January, 1974–January, 1986 | Changes in short interest and subsequent stock returns are not related |
| Bris et al. (2007) | Legal restrictions on short sales and market efficiency | Global: 1990–2001 | Markets where short selling is prohibited, returns display significantly less negative skewness, and the frequency of extreme negative returns is lower |
| Brunnermeier and Oehmke (2014) | Ban on short selling of vulnerable institutions | Theoretical study | Findings supports potential justification for temporary restrictions on short selling of vulnerable institutions |
| Cao et al. (2007) | Short-sale constraint, informational efficiency, and asset price bias | Theoretical study | Short sales constraints could produce both upward and downward pressure on stock prices. The ultimate effect depends on which effect dominates |
| Cao et al. (2021) | Short sales constraints and stock price manipulation | China: 2003–2019 | Short-sales constraints induced manipulative behavior of large investors and empirical showed that stock price manipulation significantly reduced after relaxing short sales constraints |
| Chang et al. (2007) | Short sales constraints and stock returns | Hong Kong: 1994–2003 | Short-sale constrained stocks tended to be overvalued, with the degree of overvaluation increasing in the presence of investor opinion dispersion |
| Chen et al. (2002) | Breadth of ownership and stock returns | USA: 1979–1998 | The authors used low breadth of ownership as a proxy for short-sale constraints and found that these stocks underperformed subsequently |
| Damodaran and Lim (1991) | Option listing and stock returns | USA: 1973–1983 | The authors found that the listing of options leads to significantly lower variance in the daily returns or the underlying stocks. They also found that prices adjust much more quickly to new information after the listing of options. |
| Danielsen and Sorescu (2001) | Availability of option trading and stock prices | USA: 1973–1995 | The authors provide evidence that the negative abnormal returns and increased short interest are consistent with the mitigation of short-sale constraints resulting from the option introduction |
| D’avolio (2002) | The market for borrowing stock | USA: April, 2000–September, 2001 | The authors provided evidence that stocks with higher borrowing costs subsequently underperformed, and this underperformance was more pronounced for stocks with greater divergence of opinion |
| Deng et al. (2020) | Short-sale constraints and stock price crash risk | USA: 2001–2010 | The authors found that lifting of short sales constraints reduced crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency |
| Desai et al. (2002) | Short interest and stock returns | USA: June, 1988–December, 1994 | the authors provided evidence that heavily shorted stocks experienced significantly negative abnormal returns |
| Diamond and Verrecchia (1987) | Short sales constraints and asset price adjustment to private information | Theoretical study | The demand for short sales conveys bearish signals. As short sellers are assumed to be informed and rational investors, their trades can also signal a mispricing of stocks |
| Diether et al. (2009) | Regulation on short selling and stock returns | USA: February, 2005–July, 2005 | Short-selling activity increased both for NYSE- and Nasdaq-listed Pilot stocks, but returns and volatility at the daily level remained unaffected |
| Duffie et al. (2002) | Securities lending, shorting, and pricing | Theoretical study | The authors argued that the challenges in locating lendable securities led to an initial increase in security prices, followed by a subsequent decline |
| Duong et al. (2017) | The information value of stock lending | USA: 2007–2010 | Expensive stocks exhibited lower future returns, even after controlling for shorting demand, suggesting that institutional investors played a significant role in the return predictability of stocks |
| Evans et al. (2012) | Equity lending, investment restrictions, and fund performance | USA: 1996–2009 | Active institutional investors are less likely to lend stocks compared to passive institutional investors for the consideration of retaining fund values |
| Figlewski and Webb (1993) | Options, short sales, and market completeness | January, 1973–June, 1979 | The authors provided empirical evidence that investors facing short-sale constraints turned to options as a substitute for short selling stocks, thereby reducing the impact of short-sale constraints |
| Gopalan (2003) | Short sales constraints, difference of opinion and stock returns | USA: 1992–2000 | The author found that stocks with high short interest subsequently underperformed when the dispersion of analyst forecasts was greater |
| Geczy et al. (2002) | Cost of borrowing and short sales constraints | USA: November, 1998–October, 1999 | The authors found that the loans of initial public offering, DotCom, large-cap, growth and low-momentum stocks to be cheap relative to the strategies’ documented profits and that investors who can short only stocks that are cheap and easy to borrow can enjoy at least some of the profits of unconstrained investors |
| Grundy et al. (2012) | Options market and short sales constraints | USA: 2008–2009 | The authors found that trading volume in the options market did not increase when short sales were banned during the 2008 financial crisis period, indicating that options availability could not serve as a viable alternative to short sales |
| Guo and Wu (2019) | Short interest, stock returns and credit ratings | USA: January, 1986–February, 2017 | The authors reported that the predictive power of short interest for future returns was concentrated in the worst-rated stocks |
| Hanauer et al. (2023) | Surprise in short interest and stock returns | USA: May 1980–December, 2018 | The authors found that surprise in short interest negatively predicted the cross section of both U.S. and international stock returns |
| Hao et al. (2013) | Short sales and put options | USA: March, 2005–June, 2007 | The authors found that put options became more informative before the release of negative information even when short sales were allowed, suggesting that the options market attracted more informed trading |
| Hansson and Fros (2009) | Market impact of short sales ban in the UK | UK: 2008–2009 | During the financial crisis period of 2008–2009, the UK authority restricted short selling activities substantially. However, the authors did not find a significant effect of such restrictions on abnormal returns and volatility of stocks |
| Harris et al. (2013) | Price inflation and wealth transfer during the 2008 SEC short-sale ban | USA: Short selling ban imposed on September, 2008 | The authors examined the ban on short selling of financial stocks in 2008 and observed that the banned stocks earned positive excess returns |
| Harrison and Kreps (1978) | Short sales constraints, divergence of opinion, and stock prices | Theoretical study | The authors argued that short-sale constraints, when coupled with investor divergence of opinion, could push stock prices beyond the valuation of the most optimistic investors based on their expectations of future earnings |
| Hong and Stein (2003) | Short sales constraints, divergence of opinion, and market crashes | Theoretical study | The authors contended that the bearish investors' negative information did not initially manifest in stock prices due to short-sale constraints. When surfaced, the market began to decline, intensifying the downward spiral and ultimately leading to a crash |
| Huszár and Prado (2019) | Comparing the over-the-counter and centralized stock lending markets | Japan: July, 2006–December, 2009 | The author argued that short-selling activities in the decentralized market aided in the price discovery process, which was not documented for the centralized market |
| Jarrow (1980) | Heterogeneous expectations, restrictions on short sales, and equilibrium asset prices | Theoretical study | The author contended that asset prices could either rise or fall due to short sales constraints. However, under homogeneous expectations regarding the asset prices for the next period, restrictive short-sales would only result in an increase in risky asset prices |
| Jones and Lamont (2002) | Short-sale constraints and stock returns | USA: 1926–1933 | The authors provided evidence that hard-to-borrow stocks were overvalued and yielded lower subsequent returns |
| Khan et al. (2019) | Short sales constraints, regulations, and stock returns | Japan: January, 2012–July, 2016 | The authors found that stocks with higher short interest were generally overvalued, but the degree of overvaluation did not increase significantly in the presence of strict short-selling regulations |
| Khan et al. (2018) | Short sales constraints in a centralized lending market | Japan: November, 2015–May, 2016 | The authors compared short-sale constraints in a centralized market (e.g. Tokyo Stock Exchange) and a decentralized lendable stock market (e.g. New York Stock Exchange). They found that the cost of borrowing is lower in a centralized lendable stock market, implying that short-sale constraints are less severe in centralized markets |
| Kolasinski et al. (2013) | Supply and search in the equity lending market | USA: September, 2003–December, 2007 | When demand is moderate, lending fees are largely insensitive to demand shocks. However, when demand is high, lending fees increase significantly and the extent to which demand shocks impact fees is also related to search frictions in the loan market |
| Lamont and Stein (2004) | Aggregate short interest and market valuations | USA: 1960–2002 | The authors did not observe a significant relationship between aggregate short interest and subsequent market returns |
| Lamont (2012) | Firm’s initiative to influence short sales and stock returns | USA: 1977–2002 | The author argued that firms were less likely to allow their stock to be sold short anticipating that firm value would go down and, therefore, used various methods to restrict short selling, such as legal threats, investigations, lawsuits, and others |
| Li et al. (2022) | Short sales constraints and diffusion of information | China: January, 2001–February, 2019 | The authors found that short sales constraints significantly delayed the incorporation of information in stock prices and such restriction had significant return predictability |
| Luu et al. (2023) | Short selling during the Covid-19 pandemic | USA: January, 2019–April, 2020 | The authors found that stocks with higher foreign exposure and limited financial flexibility were more likely to be shorted. They concluded that given the significant role of short sales in the price discovery process, banning short selling during the pandemic period would not be advisable |
| Miller (1977) | Risk, uncertainty, and divergence of opinion | Theoretical study | The author argued that in the presence of market frictions like short-sale constraints, divergence of opinion was priced at a premium, i.e. stocks price became higher in the presence of short sales constraints and divergence of opinion |
| Nagel (2005) | Short sales, institutional investors, and stock returns | USA: 1980–2003 | The author found that short-sales constrained stocks, as proxied by low institutional ownership, tended to underperform subsequently particularly among stocks with high market-to-book, analyst forecast dispersion, turnover, and volatility |
| Ofek et al. (2004) | Limited arbitrage, option market, and short sales constraints | USA: July, 1999–November, 2001 | The availability of option trading mitigates the effect of short-sale constraints on stock prices |
| Phillips (2011) | Options, short-sale constraints, and market efficiency | USA: 1980–2005 | The availability of option trading significantly reduces the effect of short-sale constraints on stock prices in relation to negative news |
| Prado et al. (2016) | Ownership structure, limits to arbitrage, and stock returns | USA: 2006–2010 | The authors argued that stocks with lower and more concentrated ownership were responsible for lower lending supply and higher short-sale constraints |
| Purnanandam and Seyhun (2018) | Private information, short sales constraints and stock returns | USA: 1991–2011 | The authors used insider-trading activities as a proxy for private information and observed that short selling constraints, measured by standardized short interest ratio, provided significant information about future stock returns |
| Rapach et al. (2016) | Short interest and aggregate stock returns | USA: 1990–1998 | The authors found that short interest at the aggregate level was the strongest predictor of stock returns, confirming prior findings that short sellers are informed traders capable of predicting stock returns |
| Saffi and Sigurdsson (2011) | Price efficiency and short selling | Global: 2005–2008 | The authors found that stocks with higher short-sale constraints, measured as low lending supply, have lower price efficiency. Moreover, relaxing short-sales constraints is not associated with an increase in either price instability |
| Scheinkman and Xiong (2003) | Overconfidence and speculative bubbles | Theoretical study | The authors argued that in the presence of investor heterogeneity and short-sale constraints, only the optimistic investors' views were reflected in prices, effectively sidelining pessimistic investors. This phenomenon created price bubbles and set the stage for market crashes |
| Senchak and Starks (1993) | Short-sale constraints and market reaction to short interest | USA: January, 1980–December, 1986 | The authors found that subsequent underperformance was evident with stocks featuring higher unexpected short interest and stocks with tradable options |
| Skinner (1990) | Options markets and the information content earnings releases | USA: April, 1973–December, 1986 | The author found that restrictions on short sales could be partially alleviated through option trading, as investors can effectively replicate cash flows from short selling of stocks by appropriately designing call options or put options |
| Takahashi (2010) | Short-sale inflow and stock returns | Japan: December, 1997–March, 2008 | The author investigated the relationship between flow-based shorting demand and subsequent stock return behavior, concluding that the least heavily shorted stocks outperformed the most heavily shorted ones |
| Wang and Lee (2015) | Foreign short sellers and stock returns | Korea: January, 2006–May, 2010 | The authors found that higher short interest was associated with subsequent negative returns for foreign short sellers |
| Woolridge and Dickinson (1994) | Short selling and common stock prices | USA: 1986–1991 | The authors argued that short sellers played no role in driving stock prices down but instead provided liquidity to the market |
| Yuan (2004) | Asymmetric information, trading constraints, and asset pricing | Theoretical study | The authors found that the presence of short-sale constraints and information asymmetry led to more pronounced large price movements, with crashes occurring much more rapidly than the formation of bubbles |
| Authors (Year) | Research topic | Sample period/country | Major findings |
|---|---|---|---|
| Institutional investors and supply of lendable stock | USA: 2007–2009 | Institutional investors limit the supply of lendable stocks due to their preference for voting rights, thereby constraining short sales | |
| Short sales constraints and asymmetric information | Theoretical study | Short sales constraints create bubbles in stock prices | |
| Institutional ownership, short interest, and stock returns | USA: 1980–2002 | Stocks with high short interest exhibit a strong and significantly negative relationship with stock returns | |
| Costly short selling and lending market | Theoretical study | A dynamic model where investors’ belief disagreement leads to higher shorting demand and predicts stock returns negatively | |
| Short sales constraints and stock overvaluation | USA: 2005–2008 | The authors report extreme overpricing and subsequent reversals where short sales are specially binding | |
| Asset prices under short-sale constraints | Theoretical study | Short-sale constraints could exert either upward or downward pressure on stock prices, contingent on the types of trades being restricted | |
| Short interest and disclosure of information | USA: 2001–2010 | Stocks with high residual short interest were significantly overvalued. Managers had a tendency to withhold bad news | |
| Short sales ban and equity options market | USA: August 1, 2008–October 21, 2008 | Trading volume in the options market did not increase when short sales were banned, indicating that options availability was not a good proxy for short sales | |
| Short sales ban and stock prices | Global: January, 2008–June, 2009 | Ban on short selling reduces liquidity and slows price discovery process, but was not associated with stock returns except in the US | |
| Short sellers and stock returns | USA: July, 2004–December, 2013 | Supply constraints made short sales challenging and stocks constrained by short sales subsequently underperformed | |
| Short sale constraints, differences of opinion, and overvaluation | USA: January, 1988–December, 2002 | The authors used low market capitalization stocks to proxy for short-sale constraints and found that underperformance of stocks with high short interest was concentrated among stocks with low market capitalization | |
| Elimination of the uptick rule and stock prices | USA: January, 2007–August 2007 | Elimination of uptick rule increased shorting activities but did not have impact on stock prices | |
| Ban on short selling and stock returns | USA: August 1, 2008–October 31, 2008 | Although shorting activities dropped significantly there was no impact on stock prices due to the ban on short selling | |
| Comparison of return predictability in short selling and in put options | USA: Risk adjusted returns of 1,186 stocks | Underperformance of short sale constrained stocks are evident but the availability of option trading reduces the impact of short sales constraints | |
| Impact of equity loan market on stock prices | Theoretical study | Hard-to-borrow stocks have lower subsequent returns than other stocks, with negative returns concentrated in stocks with high heterogeneity in investor beliefs | |
| Short interest and subsequent stock returns | USA: January, 1974–January, 1986 | Changes in short interest and subsequent stock returns are not related | |
| Legal restrictions on short sales and market efficiency | Global: 1990–2001 | Markets where short selling is prohibited, returns display significantly less negative skewness, and the frequency of extreme negative returns is lower | |
| Ban on short selling of vulnerable institutions | Theoretical study | Findings supports potential justification for temporary restrictions on short selling of vulnerable institutions | |
| Short-sale constraint, informational efficiency, and asset price bias | Theoretical study | Short sales constraints could produce both upward and downward pressure on stock prices. The ultimate effect depends on which effect dominates | |
| Short sales constraints and stock price manipulation | China: 2003–2019 | Short-sales constraints induced manipulative behavior of large investors and empirical showed that stock price manipulation significantly reduced after relaxing short sales constraints | |
| Short sales constraints and stock returns | Hong Kong: 1994–2003 | Short-sale constrained stocks tended to be overvalued, with the degree of overvaluation increasing in the presence of investor opinion dispersion | |
| Breadth of ownership and stock returns | USA: 1979–1998 | The authors used low breadth of ownership as a proxy for short-sale constraints and found that these stocks underperformed subsequently | |
| Option listing and stock returns | USA: 1973–1983 | The authors found that the listing of options leads to significantly lower variance in the daily returns or the underlying stocks. They also found that prices adjust much more quickly to new information after the listing of options. | |
| Availability of option trading and stock prices | USA: 1973–1995 | The authors provide evidence that the negative abnormal returns and increased short interest are consistent with the mitigation of short-sale constraints resulting from the option introduction | |
| The market for borrowing stock | USA: April, 2000–September, 2001 | The authors provided evidence that stocks with higher borrowing costs subsequently underperformed, and this underperformance was more pronounced for stocks with greater divergence of opinion | |
| Short-sale constraints and stock price crash risk | USA: 2001–2010 | The authors found that lifting of short sales constraints reduced crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency | |
| Short interest and stock returns | USA: June, 1988–December, 1994 | the authors provided evidence that heavily shorted stocks experienced significantly negative abnormal returns | |
| Short sales constraints and asset price adjustment to private information | Theoretical study | The demand for short sales conveys bearish signals. As short sellers are assumed to be informed and rational investors, their trades can also signal a mispricing of stocks | |
| Regulation on short selling and stock returns | USA: February, 2005–July, 2005 | Short-selling activity increased both for NYSE- and Nasdaq-listed Pilot stocks, but returns and volatility at the daily level remained unaffected | |
| Securities lending, shorting, and pricing | Theoretical study | The authors argued that the challenges in locating lendable securities led to an initial increase in security prices, followed by a subsequent decline | |
| The information value of stock lending | USA: 2007–2010 | Expensive stocks exhibited lower future returns, even after controlling for shorting demand, suggesting that institutional investors played a significant role in the return predictability of stocks | |
| Equity lending, investment restrictions, and fund performance | USA: 1996–2009 | Active institutional investors are less likely to lend stocks compared to passive institutional investors for the consideration of retaining fund values | |
| Options, short sales, and market completeness | January, 1973–June, 1979 | The authors provided empirical evidence that investors facing short-sale constraints turned to options as a substitute for short selling stocks, thereby reducing the impact of short-sale constraints | |
| Short sales constraints, difference of opinion and stock returns | USA: 1992–2000 | The author found that stocks with high short interest subsequently underperformed when the dispersion of analyst forecasts was greater | |
| Cost of borrowing and short sales constraints | USA: November, 1998–October, 1999 | The authors found that the loans of initial public offering, DotCom, large-cap, growth and low-momentum stocks to be cheap relative to the strategies’ documented profits and that investors who can short only stocks that are cheap and easy to borrow can enjoy at least some of the profits of unconstrained investors | |
| Options market and short sales constraints | USA: 2008–2009 | The authors found that trading volume in the options market did not increase when short sales were banned during the 2008 financial crisis period, indicating that options availability could not serve as a viable alternative to short sales | |
| Short interest, stock returns and credit ratings | USA: January, 1986–February, 2017 | The authors reported that the predictive power of short interest for future returns was concentrated in the worst-rated stocks | |
| Surprise in short interest and stock returns | USA: May 1980–December, 2018 | The authors found that surprise in short interest negatively predicted the cross section of both U.S. and international stock returns | |
| Short sales and put options | USA: March, 2005–June, 2007 | The authors found that put options became more informative before the release of negative information even when short sales were allowed, suggesting that the options market attracted more informed trading | |
| Market impact of short sales ban in the UK | UK: 2008–2009 | During the financial crisis period of 2008–2009, the UK authority restricted short selling activities substantially. However, the authors did not find a significant effect of such restrictions on abnormal returns and volatility of stocks | |
| Price inflation and wealth transfer during the 2008 SEC short-sale ban | USA: Short selling ban imposed on September, 2008 | The authors examined the ban on short selling of financial stocks in 2008 and observed that the banned stocks earned positive excess returns | |
| Short sales constraints, divergence of opinion, and stock prices | Theoretical study | The authors argued that short-sale constraints, when coupled with investor divergence of opinion, could push stock prices beyond the valuation of the most optimistic investors based on their expectations of future earnings | |
| Short sales constraints, divergence of opinion, and market crashes | Theoretical study | The authors contended that the bearish investors' negative information did not initially manifest in stock prices due to short-sale constraints. When surfaced, the market began to decline, intensifying the downward spiral and ultimately leading to a crash | |
| Comparing the over-the-counter and centralized stock lending markets | Japan: July, 2006–December, 2009 | The author argued that short-selling activities in the decentralized market aided in the price discovery process, which was not documented for the centralized market | |
| Heterogeneous expectations, restrictions on short sales, and equilibrium asset prices | Theoretical study | The author contended that asset prices could either rise or fall due to short sales constraints. However, under homogeneous expectations regarding the asset prices for the next period, restrictive short-sales would only result in an increase in risky asset prices | |
| Short-sale constraints and stock returns | USA: 1926–1933 | The authors provided evidence that hard-to-borrow stocks were overvalued and yielded lower subsequent returns | |
| Short sales constraints, regulations, and stock returns | Japan: January, 2012–July, 2016 | The authors found that stocks with higher short interest were generally overvalued, but the degree of overvaluation did not increase significantly in the presence of strict short-selling regulations | |
| Short sales constraints in a centralized lending market | Japan: November, 2015–May, 2016 | The authors compared short-sale constraints in a centralized market (e.g. Tokyo Stock Exchange) and a decentralized lendable stock market (e.g. New York Stock Exchange). They found that the cost of borrowing is lower in a centralized lendable stock market, implying that short-sale constraints are less severe in centralized markets | |
| Supply and search in the equity lending market | USA: September, 2003–December, 2007 | When demand is moderate, lending fees are largely insensitive to demand shocks. However, when demand is high, lending fees increase significantly and the extent to which demand shocks impact fees is also related to search frictions in the loan market | |
| Aggregate short interest and market valuations | USA: 1960–2002 | The authors did not observe a significant relationship between aggregate short interest and subsequent market returns | |
| Firm’s initiative to influence short sales and stock returns | USA: 1977–2002 | The author argued that firms were less likely to allow their stock to be sold short anticipating that firm value would go down and, therefore, used various methods to restrict short selling, such as legal threats, investigations, lawsuits, and others | |
| Short sales constraints and diffusion of information | China: January, 2001–February, 2019 | The authors found that short sales constraints significantly delayed the incorporation of information in stock prices and such restriction had significant return predictability | |
| Short selling during the Covid-19 pandemic | USA: January, 2019–April, 2020 | The authors found that stocks with higher foreign exposure and limited financial flexibility were more likely to be shorted. They concluded that given the significant role of short sales in the price discovery process, banning short selling during the pandemic period would not be advisable | |
| Risk, uncertainty, and divergence of opinion | Theoretical study | The author argued that in the presence of market frictions like short-sale constraints, divergence of opinion was priced at a premium, i.e. stocks price became higher in the presence of short sales constraints and divergence of opinion | |
| Short sales, institutional investors, and stock returns | USA: 1980–2003 | The author found that short-sales constrained stocks, as proxied by low institutional ownership, tended to underperform subsequently particularly among stocks with high market-to-book, analyst forecast dispersion, turnover, and volatility | |
| Limited arbitrage, option market, and short sales constraints | USA: July, 1999–November, 2001 | The availability of option trading mitigates the effect of short-sale constraints on stock prices | |
| Options, short-sale constraints, and market efficiency | USA: 1980–2005 | The availability of option trading significantly reduces the effect of short-sale constraints on stock prices in relation to negative news | |
| Ownership structure, limits to arbitrage, and stock returns | USA: 2006–2010 | The authors argued that stocks with lower and more concentrated ownership were responsible for lower lending supply and higher short-sale constraints | |
| Private information, short sales constraints and stock returns | USA: 1991–2011 | The authors used insider-trading activities as a proxy for private information and observed that short selling constraints, measured by standardized short interest ratio, provided significant information about future stock returns | |
| Short interest and aggregate stock returns | USA: 1990–1998 | The authors found that short interest at the aggregate level was the strongest predictor of stock returns, confirming prior findings that short sellers are informed traders capable of predicting stock returns | |
| Price efficiency and short selling | Global: 2005–2008 | The authors found that stocks with higher short-sale constraints, measured as low lending supply, have lower price efficiency. Moreover, relaxing short-sales constraints is not associated with an increase in either price instability | |
| Overconfidence and speculative bubbles | Theoretical study | The authors argued that in the presence of investor heterogeneity and short-sale constraints, only the optimistic investors' views were reflected in prices, effectively sidelining pessimistic investors. This phenomenon created price bubbles and set the stage for market crashes | |
| Short-sale constraints and market reaction to short interest | USA: January, 1980–December, 1986 | The authors found that subsequent underperformance was evident with stocks featuring higher unexpected short interest and stocks with tradable options | |
| Options markets and the information content earnings releases | USA: April, 1973–December, 1986 | The author found that restrictions on short sales could be partially alleviated through option trading, as investors can effectively replicate cash flows from short selling of stocks by appropriately designing call options or put options | |
| Short-sale inflow and stock returns | Japan: December, 1997–March, 2008 | The author investigated the relationship between flow-based shorting demand and subsequent stock return behavior, concluding that the least heavily shorted stocks outperformed the most heavily shorted ones | |
| Foreign short sellers and stock returns | Korea: January, 2006–May, 2010 | The authors found that higher short interest was associated with subsequent negative returns for foreign short sellers | |
| Short selling and common stock prices | USA: 1986–1991 | The authors argued that short sellers played no role in driving stock prices down but instead provided liquidity to the market | |
| Asymmetric information, trading constraints, and asset pricing | Theoretical study | The authors found that the presence of short-sale constraints and information asymmetry led to more pronounced large price movements, with crashes occurring much more rapidly than the formation of bubbles |
Source: table created by the author
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