October 7, 2026BlogExternal Research
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Short selling helps investors assess companies’ value, makes shares easier to trade, and lowers financing costs for businesses. Research by Copenhagen Economics, commissioned by MFA, finds that EU rules publicly identifying individual short sellers discourage informed trading and encourage herding, weakening the benefits short selling brings to investors and businesses.
Drawing on European market data and economic research, the study finds that named disclosure can discourage informed trading, encourage investors to follow one another, and increase volatility. The consequences extend beyond short sellers to pension funds, households, and companies raising capital.
WHY SHORT SELLING MATTERS
How short selling helps markets work better
Markets work better when prices reflect the information available about a company, including negative information. Short sellers help that process by acting on research suggesting a stock is overvalued. In its analysis of disclosed positions across seven European markets from 2015 to 2025, Copenhagen Economics finds that stocks with higher disclosed short interest subsequently underperform. The findings suggest that short sellers, on average, identify overvaluation before the wider market catches up.
More accurate prices
Informed trading helps share prices reflect negative information, supporting better investment decisions.
More liquid markets
Short selling supports trading and market making, helping investors buy and sell at lower cost.
This contribution is particularly valuable in less-liquid stocks, where prices take longer to adjust. Short selling also adds shares available for trading and supports market makers, which help investors buy and sell. Evidence from bans in Europe and the United States shows that restrictions widen bid-ask spreads and raise trading costs. More accurate prices and better liquidity therefore benefit investors who never take a short position themselves.
PUBLIC DISCLOSURE
Why naming individual investors matters
The central policy question in the report concerns what the public sees. Major markets provide regulators with information to supervise short selling. Under the EU framework examined in the study, a net short position reaching 0.5% of a company’s issued share capital also triggers public disclosure of the investor’s identity and position.
The EU is among the few developed markets that retain named individual disclosure, according to the report. The study contrasts that approach with aggregate short-interest reporting in the United States and the UK’s move to anonymized aggregate disclosure. Public identification can expose investors to short squeezes, copycat trading, and reputational risks. Those risks can change whether an investor takes or increases a position.
THREE REINFORCING CHANNELS
How named public disclosure weakens market quality
01 Deters short selling
Limits the flow of informed negative views into prices.
02 Encourages herding
Following disclosed positions can amplify price moves.
03 Increases volatility
Amplified trading can push prices beyond fundamental value.
Adapted from Figure 1. Source: Copenhagen Economics.
The evidence points to three connected effects. First, investors are less likely to increase positions just below the public disclosure threshold, limiting informed participation. Second, other investors follow visible positions. Danish data show that investors increase their short positions around 2.4 times as much following a public disclosure as following a comparable non-public change.
Third, new short interest disclosure is associated with around 2.9% higher daily stock volatility. The researchers identify herding as the most likely explanation: investors following disclosed positions can amplify price moves, potentially pushing prices beyond fundamental value. Together, these effects can slow the incorporation of negative information into prices and increase the risk investors bear.
€11
billion
Estimated annual reduction in firms’ cost of capital through short selling’s liquidity benefits.
THE BENEFIT FOR COMPANIES
The benefits reach companies raising capital
These trading conditions also affect businesses. When short selling improves liquidity, bid-ask spreads, the gap between buying and selling prices, narrow. Lower trading costs reduce the return investors require to hold shares, lowering companies’ cost of equity capital.
Copenhagen Economics estimates that this liquidity benefit reduces firms’ annual cost of capital by approximately €11 billion.
To calculate the benefit, the researchers draw on evidence that European short-selling bans widen spreads by 7.7% on average. They translate that effect into required returns and scale it to €13.9 trillion in STOXX Europe market capitalization. The estimate covers liquidity alone, excluding potential benefits from lower risk premia. It measures short selling’s contribution, rather than savings from changing disclosure rules.
THE POLICY TAKEAWAY
What the findings mean for policy
The findings give policymakers reasons to reconsider how public disclosure is designed. Anonymized aggregate information can provide transparency alongside detailed regulatory reporting while avoiding some of the costs of naming individual investors. The broader lesson is that disclosure rules affect the informed trading and liquidity on which investors and companies depend.
