Informed Short Selling, Fails-to-Deliver, and Abnormal Returns

62 Pages Posted: 2 Jul 2014 Last revised: 10 Jun 2016

Thomas Stratmann

George Mason University - Buchanan Center Political Economy; CESifo (Center for Economic Studies and Ifo Institute)

John W. Welborn

Dartmouth College

Date Written: May 18, 2016

Abstract

We find that stocks with fails-to-deliver (FTDs) experience negative abnormal returns that are proportional to their FTD levels. These findings come from both an event study and a portfolio returns analysis using Fama-French factors. Using proprietary data on stock borrow costs, we also show that short sellers of low and high FTD stocks obtain positive estimated profits. Our findings support the hypothesis that FTDs reflect nonbinding short sale constraints which do not restrict informed short selling.

Keywords: abnormal returns; fail-to-deliver; Fama-French; event study; short selling

JEL Classification: G12; G14; G21; G28; K22

Suggested Citation

Stratmann, Thomas and Welborn, John W., Informed Short Selling, Fails-to-Deliver, and Abnormal Returns (May 18, 2016). Journal of Empirical Finance, Volume 38, Part A, September 2016, Pages 81-102; GMU Working Paper in Economics No. 14-30. Available at SSRN: https://ssrn.com/abstract=2461088 or http://dx.doi.org/10.2139/ssrn.2461088

Thomas Stratmann

George Mason University - Buchanan Center Political Economy ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-2330 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

John W. Welborn (Contact Author)

Dartmouth College ( email )

Hanover, NH 03755
United States

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