Naked Short Selling and Market Returns
Thomas Jason Boulton
Marcus V. Braga-Alves
University of Akron
May 1, 2011
Journal of Portfolio Management, Spring 2012, Vol. 8, No. 3, pp. 133-142.
We study persistent failures to deliver (fails) to better understand naked short sellers’ trading strategies, their ability to profit from their trades, and the market’s reaction to information about their activities. Contrary to recent claims that naked short sellers are momentum traders who drive down stock prices, we find that returns are typically positive just prior to periods of increased naked short selling that result in persistent fails and that returns generally remain positive for several weeks afterwards. Our results also suggest that stocks that experience persistent fails are susceptible to short squeezes, as shares move from a normal state where short exposure is established by borrowing and selling to a hard-to-borrow state where fails become a more attractive option for establishing short exposure.
Keywords: Failures to deliver, naked short selling, stock returns
JEL Classification: D02, G14, G28
Date posted: April 6, 2009 ; Last revised: May 2, 2012