Naked Short Selling and the Market Impact of Failures-to-Deliver: Evidence from the Trading of Real Estate Investment Trusts

41 Pages Posted: 19 Apr 2010 Last revised: 24 Apr 2010

See all articles by Erik Devos

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Michael D. McKenzie

The University of Sydney - Discipline of Finance; University of Cambridge - Cambridge Endowment for Research in Finance (CERF); Financial Research Network (FIRN)

James Upson

University of Texas at El Paso

Date Written: April 19, 2010

Abstract

We investigate the impact of failures-to-deliver on the performance of 116 Real Estate Investment Trusts (REITs) during a period of substantial short selling (calendar years 2007 and 2008). REIT shares typically are easy to borrow, have high transparency (low information asymmetry), and are exposed to systematic risk during the sample period, making them short sale targets. We find that the majority of failure-to-deliver events are quickly resolved, with durations of less than three days. Our results support the conjecture that most failures-to-deliver result from short sellers covering their trades before the settlement date of the initial sale. Since the failure is resolved when the covering purchase settlement day arrives, traders forego borrowing which results in a failure-to-deliver. However, failures-to-deliver that are outstanding for many days have lower risk adjusted returns. Our results support the actions taken by the SEC in September of 2008 to tighten the delivery requirement of stock trades.

Keywords: Short Selling, Failures-to-deliver, Financial Crisis, Regulation, REITs, Naked Short Selling

JEL Classification: G01, G12, G14, G18

Suggested Citation

Devos, Erik and McInish, Thomas H. and McKenzie, Michael David and Upson, James, Naked Short Selling and the Market Impact of Failures-to-Deliver: Evidence from the Trading of Real Estate Investment Trusts (April 19, 2010). Available at SSRN: https://ssrn.com/abstract=1592446 or http://dx.doi.org/10.2139/ssrn.1592446

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

Michael David McKenzie

The University of Sydney - Discipline of Finance ( email )

Level 2 9 Castlereagh Street
Sydney, NSW 2000
Australia
+61 2 9114 0578 (Phone)
+61 2 9351 6461 (Fax)

University of Cambridge - Cambridge Endowment for Research in Finance (CERF) ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

James Upson (Contact Author)

University of Texas at El Paso ( email )

500 West University
El Paso, TX 79968-0545
United States

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