Geographic Proximity in Short Selling

Micro-level geographic proximity is associated with higher returns from short selling, with short trades by institutions near the target headquarters followed by more negative abnormal returns. Proximity matters more for stocks that are small, volatile, and have less analyst coverage, as well as for stocks with low market correlations and inefficient prices. Funds exhibiting larger effect of proximity are smaller and have higher returns and idiosyncratic volatility. The relationship between distance and returns is weaker during the COVID-19 pandemic. Overlapping nearby bars and restaurants between target and short seller matter but not during holidays, suggesting social interactions as a channel.