When Constraints Bind

49 Pages Posted: 15 Aug 2009 Last revised: 29 Sep 2011

See all articles by Karl B. Diether

Karl B. Diether


Ingrid M. Werner

The Ohio State University - Fisher College of Business

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

Diether, Karl B. and Werner, Ingrid M., When Constraints Bind (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, Available at SSRN: https://ssrn.com/abstract=1445634 or http://dx.doi.org/10.2139/ssrn.1445634

Ingrid M. Werner

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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