TY - JOUR
T1 - On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic
AU - Greppmair, Stefan
AU - Jank, Stephan
AU - Smajlbegovic, Esad
N1 - Publisher Copyright:
© 2022
PY - 2023/2
Y1 - 2023/2
N2 - Using the exogenous shock of the COVID-19 pandemic, we study how informed market participants incorporate fiscal space into their trading decisions. At the onset of the pandemic, short-selling activity shifted towards companies with low financial flexibility but only in countries with limited fiscal space. Among such companies, short sellers specifically targeted those that generate their revenues mainly in the domestic market. These short sellers entered their positions before the market crash, thereby generating significant abnormal returns. We find no evidence of either herding behavior prior to the market crash or a long-run performance reversal of short sellers. These findings support the notion that short sellers help to promote price efficiency in times of crisis, where governments with budgetary constraints are unable to provide sufficient stimuli to their economies.
AB - Using the exogenous shock of the COVID-19 pandemic, we study how informed market participants incorporate fiscal space into their trading decisions. At the onset of the pandemic, short-selling activity shifted towards companies with low financial flexibility but only in countries with limited fiscal space. Among such companies, short sellers specifically targeted those that generate their revenues mainly in the domestic market. These short sellers entered their positions before the market crash, thereby generating significant abnormal returns. We find no evidence of either herding behavior prior to the market crash or a long-run performance reversal of short sellers. These findings support the notion that short sellers help to promote price efficiency in times of crisis, where governments with budgetary constraints are unable to provide sufficient stimuli to their economies.
UR - http://www.scopus.com/inward/record.url?scp=85139010356&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2022.106652
DO - 10.1016/j.jbankfin.2022.106652
M3 - Article
C2 - 36119141
SN - 0378-4266
VL - 147
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
M1 - 106652
ER -