A fuller theory of short selling

Harlan Platt ()
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Harlan Platt: College of Business Administration, Northeastern University

Journal of Asset Management, 2004, vol. 5, issue 1, No 6, 49-63

Abstract: Abstract The expression ‘greed and fear move markets’ is commonly cited to explain trading activity. In this paper, greed and fear form the intellectual basis of a theory explaining short selling activity. The theory describes two independent demands for shares to short sell, one based on future price expectations and one based on financial distress. With the number of shares available to be borrowed rigidly determined by institutional factors, the theory focuses on the quantity of shares shorted. An empirical test of the theory is conducted using a sample of bankrupt companies. The theory's implications are supported by the data and lend strong credence to the importance of greed and fear among short sellers.

Keywords: short selling; arbitrage; investment theory; bankruptcy (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1057/palgrave.jam.2240127

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