Fisher College of Business Working Paper No. 2009-03-015
49 Pages Posted: 15 Aug 2009 Last revised: 29 Sep 2011
Date Written: July 5, 2011
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.
Keywords: short-sales, short-sellers, contrarian, Nasdaq, Reg SHO
JEL Classification: G1, G12, G14
Suggested Citation: Suggested Citation
Diether, Karl B. and Werner, Ingrid M., When Constraints Bind (July 5, 2011). Charles A. Dice Center Working Paper No. 2009-15; Tuck School of Business Working Paper No. 2009-66. Available at SSRN: https://ssrn.com/abstract=1445634 or http://dx.doi.org/10.2139/ssrn.1445634