Daily Short Selling Around Reverse Stock Splits

We examine daily short-selling activity and prices around reverse stock splits. Using a difference-in-difference approach with a matched sample of reverse splitting and non-reverse splitting stocks, we show that short selling increases in stocks that reverse split, relative to those that do not. Consistent with prior literature, we also document negative cumulative abnormal returns for stocks around reverse splits. Perhaps most interestingly, we find that in stocks that reverse split, short sellers appear to exacerbate the negative returns. Together, our findings indicate that limits to arbitrage do not restrict short sellers from trading on anticipated price declines