When Constraints Bind
Karl B. Diether
Tuck School of Business at Dartmouth College
Ingrid M. Werner
The Ohio State University - Fisher College of Business
July 5, 2011
Charles A. Dice Center Working Paper No. 2009-15
Fisher College of Business Working Paper No. 2009-03-015
Tuck School of Business Working Paper No. 2009-66
We create proxies for constrained supply of lendable shares by combining unique data on loan fees, stock lending activity, and failures to deliver to examine how contrarian short-sale strategies are affected by constraints. Constraints affect roughly one-third of the cross- section of stocks and result in a significant reduction in the contrarian response of short sellers to past returns. When short sellers’ contrarian strategies are constrained, the market is significantly less efficient. Furthermore, the previously documented relation between short selling activity and future returns breaks down for the most constrained stocks.
Number of Pages in PDF File: 49
Keywords: short-sales, short-sellers, contrarian, Nasdaq, Reg SHO
JEL Classification: G1, G12, G14
Date posted: August 15, 2009 ; Last revised: September 29, 2011
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