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

Antonio Gargano, Juan Sotes-Paladino, Patrick Verwijmeren*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

How synchronized are short sellers? We examine a unique dataset 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,” i.e., uncertainty among short sellers about when others will short sell (Abreu and Brunnermeier (2002, 2003)), 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.

Bibliographical note

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