Toward understanding short-selling activity: demand and supply

We investigate the demand and supply sides of short-selling activity in the US from 2003 to 2015. We construct four types of demand-side variables from fundamentals, and three types of supply-side variables from institutional ownership (IO) and stock loan data. The supply-side variables play a more important role in determining short selling than the demand-side variables. The IO of quasi-indexer type is the most important supply-side variable, while the arbitrage and hedging with options market is the most important demand-side variable. Finally, a portfolio sorting approach confirms the same results.