Short-Selling Activities in the Time of COVID-19

Highlights
•We study daily short-selling activities in the U.S. stock market during the early 2020 outbreak of the COVID-19 pandemic.

•Firms that are COVID-sensitive (i.e., with high foreign exposure, low financial or operating flexibility, or high supply-chain exposure) experienced greater short-selling pressure.

•Short-selling activities during the COVID-19 pandemic were primarily concentrated among overpriced stocks, which supports the price discovery argument.


Abstract
This study examines the daily short-selling activities in the U.S. market during the early 2020 outbreak of the COVID-19 global pandemic. Our findings indicate firms that are more sensitive to the shock (i.e., with high foreign exposure, low financial or operating flexibility, or high supply-chain exposure) were shorted more heavily. Moreover, short-selling activities during the COVID-19 pandemic, blamed for triggering stock market crashes, were primarily concentrated around overpriced stocks. This finding supports the argument that short selling plays a prominent role in improving price discoveries. Our research provides timely empirical evidence supporting the U.S. Securities and Exchange Commission’s (SEC) non-intervention approach in banning short selling in the U.S. market.