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Out of Sync: Dispersed Short Selling and the Correction of Mispricing

Published online by Cambridge University Press:  18 October 2022

Antonio Gargano Open the ORCID record for Antonio Gargano [Opens in a new window] ,
Juan Sotes-Paladino  and
Patrick Verwijmeren
Antonio Gargano*
Affiliation:
University of Houston C.T. Bauer College of Business
Juan Sotes-Paladino
Affiliation:
Universidad de los Andes, Chile jsotes@uandes.cl
Patrick Verwijmeren
Affiliation:
Erasmus School of Economics and University of Melbourne verwijmeren@ese.eur.nl
*
agargano@bauer.uh.edu (corresponding author)
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Abstract

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How synchronized are short sellers? We examine a unique data set on the distribution of profits across a stock’s short sellers and find evidence of substantial dispersion in the initiation of their positions. Consistent with this dispersion reflecting “synchronization risk,” that is, uncertainty among short sellers about when others will short sell, more dispersed short selling signals i) greater stock overpricing and ii) longer delays in overpricing correction. These effects are prevalent even among stocks facing low short-selling costs or other explicit constraints. Overall, our findings provide novel cross-sectional evidence of synchronization problems among short sellers and their pricing implications.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 8 , December 2023 , pp. 3482 - 3520
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Henk Berkman, Dan diBartolomeo (discussant), Huu Nhan Duong (discussant), Yufeng Han (discussant), Jarrad Harford (the editor), Caio Machado (discussant), Giorgo Sertsios, Esad Smajlbegovic, Kumar Venkataraman, Ingrid Werner, Antti Yang, Jianfeng Yu, Rafael Zambrana, Zhuo Zhong, and seminar participants at Point72 Asset Management, Universidad Adolfo Ibañez, the 2021 Chinese International Finance Conference, and the 2019 Behavioural Finance and Capital Markets Conference for comments and suggestions. We gratefully acknowledge the support provided by the ANID Fondecyt Initiation Grant 11190917. All errors are our own.

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