Liquid institutions’ response to the presence of short sellers in the market

Abstract

The aim of this study is to examine the influence of institutions' liquidity on the level of lending supply, short sale constraints and future stock returns, after an increase in shorting demand. By considering the interaction between outward demand shocks and the level of institutions’ liquidity we find that, in times of increasing shorting demand, the level of institutions’ liquidity is not responsible for either restricting the entrance of novel short sellers in the market or hurting existing ones; in addition, we do not find evidence of any decrease in lending supply or future returns, nor increases in loan fees or arbitrage risk.