Professor Adam Reed, Cambridge Judge Business School / Dr Matthew C. Ringgenberg, Olin Business School, Washington University in St. Louis
Short sellers face a number of unique risks, such as the risk that stock loans become expensive and the risk that stock loans are recalled. We show that these short selling risks affect prices among the cross-section of stocks. Stocks with more short selling risk have lower returns, less price efficiency, and less short selling. Overall, short selling risk adds to the limits of arbitrage and may help explain the low short-interest puzzle (Lamont and Stein (2004)) and the short interest return anomaly (Boehmer, Huszar and Jordan (2009)).