On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic

Stefan Greppmair, Stephan Jank and Esad Smajlbegovic

Journal of Banking & Finance, 2023, vol. 147, issue C

Abstract: Using the exogenous shock of the COVID-19 pandemic, we study how informed market participants incorporate fiscal space into their trading decisions. At the onset of the pandemic, short-selling activity shifted towards companies with low financial flexibility but only in countries with limited fiscal space. Among such companies, short sellers specifically targeted those that generate their revenues mainly in the domestic market. These short sellers entered their positions before the market crash, thereby generating significant abnormal returns. We find no evidence of either herding behavior prior to the market crash or a long-run performance reversal of short sellers. These findings support the notion that short sellers help to promote price efficiency in times of crisis, where governments with budgetary constraints are unable to provide sufficient stimuli to their economies.

Keywords: COVID-19 pandemic; Short selling; Fiscal space; Institutional investors (search for similar items in EconPapers)
JEL-codes: G14 G23 H30 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:147:y:2023:i:c:s0378426622002321

DOI: 10.1016/j.jbankfin.2022.106652

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