Short selling and product market competition

Rafael Matta, Sergio H. Rocha and Paulo Vaz

Journal of Banking & Finance, 2025, vol. 171, issue C

Abstract: We empirically investigate how short selling affects firms’ product market performance via a managerial monitoring channel. Using both historical data and exogenous shocks to short selling, we find robust evidence that short interest negatively impacts market shares, especially in large firms. Our Reg SHO results are stronger in concentrated industries and industries where firms compete in strategic substitutes. Further tests show that these effects are driven by low ex-ante stock price informativeness. The evidence suggests that the interaction between market power and price opacity generates incentives for overproduction, which short selling attenuates. Our results support policies that facilitate price discovery in the presence of market power.

Keywords: Short sales; Product market competition; Financial feedback; Price informativeness (search for similar items in EconPapers)
JEL-codes: D43 D82 D84 G14 G23 G34 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:171:y:2025:i:c:s0378426624002498

DOI: 10.1016/j.jbankfin.2024.107335

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