Failures to Deliver, Short Sale Constraints, and Stock Overvaluation

The Financial Review, Forthcoming

AFA 2012 Chicago Meetings Paper

39 Pages Posted: 17 Mar 2010 Last revised: 6 Dec 2014

Don M. Autore

Florida State University - College of Business

Thomas Jason Boulton

Miami University

Marcus V. Braga-Alves

University of Akron

Multiple version iconThere are 2 versions of this paper

Date Written: November 2014

Abstract

Studying a large sample of publicly available data on failures to deliver, we find that stocks reaching threshold levels of failures become significantly overvalued. Where short sale constraints are especially binding, we report extreme overpricing and subsequent reversals. These findings support the overvaluation hypothesis, although the mispricing is likely to be difficult to arbitrage because of extreme shorting costs. In addition, threshold stocks with low short interest become more overvalued than threshold stocks with high short interest. This suggests that the short interest reflects supply-side effects when the examination conditions on the difficulty of borrowing shares.

Keywords: Failures to deliver, short interest, institutional ownership, short sale constraints, stock returns

JEL Classification: D02, G14, G28

Suggested Citation

Autore, Don M. and Boulton, Thomas Jason and Braga-Alves, Marcus V., Failures to Deliver, Short Sale Constraints, and Stock Overvaluation (November 2014). The Financial Review, Forthcoming; AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1572356 or http://dx.doi.org/10.2139/ssrn.1572356

Don M. Autore

Florida State University - College of Business ( email )

821 ACADEMIC WAY, Room 314 RBA
P.O. Box 3061110
Tallahassee, FL 32306-1110
United States
850-644-7857 (Phone)

Thomas Jason Boulton (Contact Author)

Miami University ( email )

3028 Farmer School of Business
Oxford, OH 45056
United States
(513) 529-1563 (Phone)
(513) 529-8598 (Fax)

Marcus V. Braga-Alves

University of Akron ( email )

259 S. Broadway
Akron, OH 44325
United States

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