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

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.This paper was accepted by Agostino Capponi, finance.Funding: This work was supported by the University of Melbourne [Faculty Research Grant].Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01356 .