Geographic Proximity in Short Selling

Abstract

Geographic proximity is associated with significantly higher returns from short selling within London and the UK. Short trades by funds near the target headquarters are followed by larger negative abnormal returns. Proximity matters more for stocks that are smaller, more volatile, and less actively covered by sellside analysts, and less for large trades and trades following more proximate institutions' trades. Short trades are correlated geographically, with proximate funds more likely to short the same stocks. Geographically closer short trades predict more negative earnings surprises. Covering of short positions by more proximate institutions is followed by more positive abnormal stock returns.