Short-sellers: Informed but restricted

According to theory, the level of short-selling can predict short-run future returns through two channels. One channel relates to the demand-side of the stock lending market: short-sellers are informed. The other channel relates to the supply-side: short-sellers are restricted. Measuring the importance of each channel is empirically challenging when, in general, supply and demand in the stock lending market are not directly observable. This paper takes advantage of a unique dataset that contains actual shifts in lending supply of stocks on the Brazilian market and proposes an identification strategy for the effects of both supply and demand on stock prices. We find that both channels are important.