The Information in Naked Short Sales

45 Pages Posted: 2 Jul 2013 Last revised: 27 Apr 2017

See all articles by Harrison Liu

Harrison Liu

University of Texas at San Antonio - Department of Accounting

Sean T. McGuire

Texas A&M University - Department of Accounting

Edward P. Swanson

Texas A&M University - Mays Business School; Mays Business School, Texas A&M University

Date Written: April 26, 2017

Abstract

Concern over abusive short selling caused the SEC to pass a rule during the 2008 financial crisis that requires an immediate forced close-out of any equity short sale in which the short seller fails to deliver shares (FTDs) on the settlement date (“naked short sales”). While this rule dramatically reduced FTDs, it likely reduced covered short selling. We investigate whether those FTDs were information-based. We find FTD open interest 1) is consistent with valuation-relevant, financial-statement fundamentals and 2) contains unpriced information about future returns that is incremental to covered short interest. An explanation for incremental information with theoretical support is that the proportion of informed traders increases as short selling becomes more constrained. Consistent with that theory, detailed security lending data show that FTDs proxy for constrained short selling. Our results have implications for researchers and regulators in the U.S. and in several countries currently considering regulations to reduce FTDs.

Keywords: short selling, accounting fundamentals, arbitrage, trading strategies

Suggested Citation

Liu, Harrison and McGuire, Sean T. and Swanson, Edward P., The Information in Naked Short Sales (April 26, 2017). Available at SSRN: https://ssrn.com/abstract=2288187 or http://dx.doi.org/10.2139/ssrn.2288187

Harrison Liu

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Edward P. Swanson (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-8970 (Phone)
979-845-0028 (Fax)

Mays Business School, Texas A&M University ( email )

Wehner, MS 4353
College Station, TX 77843-4353
United States
979-845-5014 (Phone)
979-845-0028 (Fax)

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