The Information in Fail-to-Deliver Short Sales: Implications for Research and Regulation

49 Pages Posted: 13 Aug 2023 Last revised: 21 Aug 2023

See all articles by Harrison Liu

Harrison Liu

University of Texas at San Antonio - Department of Accounting

Edward P. Swanson

Mays Business School, Texas A&M University

Date Written: August 13, 2023

Abstract

When a short seller sells shares on day t (trade date) but fails to deliver those shares on day t+3 (settlement date), non-existent (electronic) shares are in circulation. Corporate executives and regulators often contend that high “fail-to-deliver” (FTD) levels indicate that short sellers are forcing a company’s stock price down by artificially increasing the number of shares in circulation. This study investigates three sequential research questions relevant to price discovery: Are FTDs information-based? How does the information compare to that in covered short sales (CSS)? Is the information due to stocks that are expensive to borrow (“on special”)? For each research question, we consider two types of information: 1) accounting and market fundamentals used in financial statement analysis and shown to be associated with stock prices, and 2) future returns, which incorporate a broad information set which includes fundamentals. We conduct analyses for two time periods, with different SEC enforcement rules and economic conditions. Our results show that FTDs are information-based, the information exceeds that in CSS, and much of the information is due to stocks on special. Finding that FTDs are more information-based than previously known has important implications for regulating short selling. For researchers, FTDs provide a new source of data to study short sellers’ valuation information, including whether they establish positions in advance of adverse events and the extent to which constraints on their trading limit arbitrage.

Keywords: short selling, accounting fundamental, arbitrage, trading strategies, fails-to-deliver, naked short selling, market regulation

JEL Classification: G1, G14, G23, K22, K41, M14, M43, M45

Suggested Citation

Liu, Harrison and Swanson, Edward P., The Information in Fail-to-Deliver Short Sales: Implications for Research and Regulation (August 13, 2023). Available at SSRN: https://ssrn.com/abstract=4539714 or http://dx.doi.org/10.2139/ssrn.4539714

Harrison Liu

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

One UTSA Circle
San Antonio, TX 78249
United States

Edward P. Swanson (Contact Author)

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

338 Tuckerman Avenue
Middletown, RI 02842
United States
979-739-4414 (Phone)

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