Abstract
“Sticky” ownership (including passive, insider, and long-term ownership) could hurt short-sellers by reducing the supply of shares available to buy-to-cover their positions. We examine the adverse effect of sticky ownership on short covering by focusing on the trading around earnings announcements. Heavily-shorted firms with sticky ownership experience higher returns and subsequent reversals after positive earnings surprises. The higher returns are the result of higher volume and greater price impact of short covering. Our inferences are robust to alternative samples around large changes in sticky ownership, a two-stage approach using residual ownership, and an exogenous short-covering trigger caused by macro funding shocks. The paper highlights a “dark-side” of sticky ownership to short-sellers, in contrast to prior work showing that passive ownership helps them by increasing lendable shares. The findings also suggest that the short covering and its interaction with ownership structure are correlated omitted variables in explaining earnings announcement returns.
Published Version
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