Failures to Deliver, Short Sale Constraints, and Stock Overvaluation

Autore, Don M.; Boulton, Thomas J.; Braga‐Alves, Marcus V.

doi:10.1111/fire.12063

Cited by 22 publications

(8 citation statements)

References 53 publications

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“…They find more short selling ahead of upgrades, indicating short sellers do not predict the direction of analyst opinion well. Autore et al (2015) find that low levels of short interest predict greater overvaluation than high short interest. They suggest low short interest levels might indicate greater difficulty in borrowing shares, which leads to greater overvaluation.…”

Section: Literature Reviewmentioning

confidence: 73%

Short interest in mergers: anomalies in the overvaluation hypothesis

Davis

Coy²,

Solis³

2018

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Purpose High short interest is associated with overvaluation, and the purpose of this paper is to find contradictions to the commonly held “overvaluation hypothesis” when merger and acquisition (M&A) targets are examined. This paper extends the work of Ben-David et al. (2015), who confirm high short interest indicates overvaluation when focused on acquiring firms. Design/methodology/approach Short interest is examined as a predictor of acquisition likelihood using longitudinal data for US firms from 2003 to 2013. How short interest impacts the premiums paid by acquiring firms is examined with target, acquirer and deal characteristics. Findings M&A targets have high short interest and short interest increases acquisition likelihood, suggesting undervaluation. Highly shorted firms also experience outsized reductions in share price prior to merger announcements, and the premiums paid are also significantly predicted by short interest levels. Research limitations/implications Short selling activity can be motivated for reasons other than overvaluation, and many short positions can be held for long periods before they are closed, leading to high short interest levels for extended periods. Therefore, investors and researchers are cautioned that high short interest levels may exist in stocks that have already declined in price and could be poised for a reversal. Originality/value This study adds to the growing body of work indicating that short interest might not be the signal of overvaluation most researchers accept it to be.

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Section: Literature Reviewmentioning

confidence: 73%

Short interest in mergers: anomalies in the overvaluation hypothesis

Davis

Coy²,

Solis³

2018

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“…Our second proxy of borrowing constraints is failures‐to‐deliver (FTD). Securities with more FTD are considered hard‐to‐borrow given their high short‐sale constraints and high loan fees (Autore et al, 2015). We sort our sample of US‐listed securities into quartiles by median pre‐event FTD, where securities in the lowest quartile are the easiest‐to‐borrow and securities in the highest quartile are the most difficult‐to‐borrow.…”

Section: Empirical Results: T+3 To T+2 Settlement Cycle and Liquiditymentioning

confidence: 99%

Settling down: T+2 settlement cycle and liquidity

Baig

Breeze

Cox

et al. 2021

Euro Fin Management

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We examine the effects of a shortened settlement cycle on liquidity. Our difference-in-difference results show that securities listed on US stock exchanges become more liquid, relative to similarly matched securities listed on the London Stock Exchange, after the standard settlement cycle in the United States was reduced from T+3 to T+2. These results hold across various low-and high-frequency measures of liquidity and empirical model specifications. Furthermore, we find that securities that are more difficult-to-borrow experience the greatest gains in liquidity. Our findings might provide insights to regulators and exchange officials considering the adoption of a shortened settlement cycle.

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“…Lecce, Lepone, McKenzie and Segara () use data from Australian stock exchange and find slightly higher stock return volatility and a small reduction in liquidity when naked short sales are allowed. Autore, Boulton and Braga‐Alves () find that stocks reaching threshold levels of failures become significantly overvalued; thus, high FTDs can also be considered as a binding short‐sale constraint. Stratmann and Welborn () find that stocks with high FTDs experience abnormal negative returns, both in present and future periods.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

“…On the other hand, Lecce, Lepone, McKenzie and Segara () find that allowing naked short sales impairs market liquidity and increases market volatility. Autore, Boulton and Braga‐Alves () find that stocks reaching threshold levels of failures become significantly overvalued and Stratmann and Welborn () find that stocks with high FTDs experience abnormal negative returns, both in present and future periods. In spite of existence of any clear evidence of market manipulation using naked short selling, the SEC implemented locate and close‐out requirement for short selling to reduce FTDs.…”

Section: Introductionmentioning

confidence: 99%

Fails‐to‐Deliver before and after the Implementation of Rule 203 and Rule 204

Jain

2015

The Financial Review

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We study the determinants of fails-to-deliver in the period before and after the implementation of Rule 203 (elimination of option market maker exception from the locate and close-out requirement) and Rule 204 (t+3 close-out rule) in September 2008. We find a positive relation between short selling and fails-to-deliver that weakens after the implementation of these rules. Fails-to-deliver are higher for stocks with low institutional ownership, low book-to-market, small market capitalization, high turnover, and put option availability. The relation between short selling and these measures of borrowing costs is also weaker after the implementation of these rules.

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Failures to Deliver, Short Sale Constraints, and Stock Overvaluation

Cited by 22 publications

References 53 publications

Short interest in mergers: anomalies in the overvaluation hypothesis

Short interest in mergers: anomalies in the overvaluation hypothesis

Settling down: T+2 settlement cycle and liquidity

Fails‐to‐Deliver before and after the Implementation of Rule 203 and Rule 204

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