Firm-level short selling and the local COVID-19 pandemic: Evidence from China

Abstract

Short seller trading behavior attracts much attention, especially when negative shocks occur. Recent literature has focused on the impact of the COVID-19 pandemic, an unprecedented shock, but evidence on short sellers' reactions is quite scarce. This paper investigates how short sellers responded to the local COVID-19 pandemic in China. Empirical results show that greater numbers of newly confirmed COVID-19 cases in listed firms’ headquarters locations are associated with more subsequent short selling of those firms. The results hold after addressing other potential concerns. In addition, the impact of the local COVID-19 pandemic on short selling is stronger for firms with weaker financial conditions, in more vulnerable industries, and with higher risks of a stock price crash. The impact is alleviated after lifting the lockdown restrictions in Wuhan and becomes insignificant in later outbreaks. Overall, our findings support the informational role of short sellers within the context of the COVID-19 pandemic.