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E-MailAngel Tengulov is an Assistant Professor of Finance at the University of Kansas School of Business. This post is based on a working paper by Franklin Allen, Marlene Haas, Matteo Pirovano, and Angel Tengulov. Related research from the Program on Corporate Governance includes Stock Investors’ Returns are Exaggerated (discussed on the Forum here) by Charles Wang, Jesse Fried, and Paul Ma.
A short squeeze is triggered if there is pressure on short sellers to cover their positions because of a sharp price increase or a recall of borrowed shares. This drives short sellers to close their positions early. In this article, we construct a novel measure for identifying short-squeeze events triggered by sharp price increases, i.e., a market squeeze. This measure is distinct from and complimentary to existing lender squeeze measures, i.e., measures that identify short squeezes based on borrowed shares that are recalled by the lender. The market squeeze measure was motivated by historical short-squeeze events described in the extant empirical literature on the topic, such as the January 2021 “meme” stocks squeezes (see e.g., Allen, Haas, Nowak, Pirovano, and Tengulov (2023)) and the 2008 Volkswagen squeeze (see e.g., Allen, Haas, Nowak, and Tengulov (2021)) and can be applied to all types of financial markets including equity, commodities, and bond markets.
In the study, we document the time-series evolution and cross-industry dispersion of both market and lender short squeezes in the US and the European Union (EU). We find that short-squeeze events are rare and short-lived in nature. However, a significant proportion of unique firms experience a short-squeeze in a given year in both the US and the EU. The cross-industry analysis reveals that in the US short squeezes are more frequent in the energy sector (coal and mining stocks) as well as the financial and tobacco industries, whereas in the EU short squeezes are more frequent in the tobacco and coal industries. We further investigate the determinants of short-squeezes and their costs.
International evidence about the prevalence and costs of short squeezes is important for at least two reasons. First, despite the fact that behavior intended to squeeze short sellers is illegal in most countries short-squeeze events continue to occur, with the January 2021 meme-stock squeeze events being the most prominent recent examples. Therefore, it is important to document the time-series evolution and cross-industry dispersion of short squeezes.
Second, the evidence in our paper might help inform regulators regarding the new Securities and Exchange Commission (SEC) short-selling regulation proposal. In particular, the SEC has proposed a new regulation that is intended to provide greater transparency through the publication of short-selling information. One concern related to the proposed regulation is that disclosing more short-sale information may also increase the risk of short squeezes. The regulatory proposal is somewhat similar to the short-sale disclosure requirements that the EU implemented in 2012. Our data sample covers the period before the EU implemented short-sale disclosure requirements and the period after. We do not find an increase in the short-squeeze frequency in the EU in the period after compared to before. This, in turn, somewhat mitigates concerns that short squeezes might become more prevalent once the new short-sale disclosure requirements are implemented.
Further, in our paper, we provide a comparison of relevant regulations in the US and the EU. Finally, we also review the extent to which academic literature has studied short squeezes and provide directions for future research. The complete paper is available for download here.
