Short Squeezes After Short-Selling Attacks

Abstract

We estimate the prevalence and drivers of short squeezes after short-selling attacks. Positive returns after attacks have a disproportionate tendency to fully reverse and are accompanied by heightened short covering, consistent with the presence of short squeezes. We assess and find no support for non-squeeze drivers of these positive return reversals and show they are more likely to be accompanied by squeeze-related news articles, increased stock volatility, and disruptions in the stock lending market. Using positive return reversals as a proxy for short squeezes, we estimate that 15% of short attacks experience squeezes, and squeeze risk increases with short sellers’ visibility but decreases with the credibility of their evidence. Additionally, squeezes appear to be precipitated by actions of firms and investors, including insider purchases, share recalls, retail investor trading, and firm disclosures. Our findings quantify a material risk and check on activist short selling and are especially timely given recent proposed short-selling restrictions.