Cost of Information Dissemination: Short Squeezes After Short-Selling Attacks

We study one cost of information dissemination by providing evidence of non-fundamentals-driven temporary price increases following short-selling attacks, where short sellers publicly disclose their negative information. After short attacks, about 30% of firms experience initially positive returns, but these positive returns are disproportionately likely to reverse, and positive-return-reversal stocks experience significantly heightened short covering. The combination of temporary positive price pressure and short covering is consistent with short squeezes. We estimate significant trading losses for short sellers as a result of these squeeze events but find they are difficult to predict (and thus avoid) ahead of time. Instead, our evidence suggests they may be triggered by conditions and firm actions on the day of the attack, including insider purchases. While prior research has focused on the ability of short attacks to reduce limits to arbitrage, we highlight non-fundamentals-driven price pressure as a material risk to this approach.