Short of Capital: Stock Market Implications of Short Sellers’ Losses

Antonio Gargano (), Juan Sotes-Paladino () and Patrick Verwijmeren ()
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Antonio Gargano: University of Houston, Houston, Texas 77004
Juan Sotes-Paladino: Universidad de los Andes, Chile, Santiago 7620086, Chile
Patrick Verwijmeren: Erasmus School of Economics, 3062 PA Rotterdam, Netherlands; and University of Melbourne, Parkville, Victoria 3010, Australia

Management Science, 2025, vol. 71, issue 10, 8347-8370

Abstract: We provide evidence that losses constrain short sellers but not the transmission of information to prices. Using unique data on U.S. equity lending, we document a negative impact of the mark-to-market losses of a stock’s short sellers, but no impact of their gains, on the future shorting of the stock. Consistent with funding and institutional constraints limiting short selling, we further show that the effect is highly asymmetric across different loss levels and stronger among stocks facing higher margin requirements. However, loss-making short selling has no impact on price efficiency or predictive power for returns, suggesting that these constraints affect mostly uninformed shorting activity.

Keywords: short selling; margin constraints; limits to arbitrage; informed trading (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:10:p:8347-8370

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