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Failures to Deliver, Short Sale Constraints, and Stock Overvaluation

Author

Listed:
  • Don M. Autore
  • Thomas J. Boulton
  • Marcus V. Braga-Alves

Abstract

Studying a large sample of publicly available data on failures to deliver, we find that stocks reaching threshold levels of failures become significantly overvalued. Where short sale constraints are especially binding, we report extreme overpricing and subsequent reversals. These findings support the overvaluation hypothesis, although the mispricing is likely to be difficult to arbitrage because of extreme shorting costs. In addition, threshold stocks with low short interest become more overvalued than threshold stocks with high short interest. This suggests that the level of short interest reflects supply-side effects when the examination conditions on the difficulty of borrowing shares.

Suggested Citation

  • Don M. Autore & Thomas J. Boulton & Marcus V. Braga-Alves, 2015. "Failures to Deliver, Short Sale Constraints, and Stock Overvaluation," The Financial Review, Eastern Finance Association, vol. 50(2), pages 143-172, May.
    • Handle: RePEc:bla:finrev:v:50:y:2015:i:2:p:143-172
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    File URL: http://hdl.handle.net/10.1111/fire.12063
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    Citations

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    Cited by:

    1. Stratmann, Thomas & Welborn, John W., 2016. "Informed short selling, fails-to-deliver, and abnormal returns," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 81-102.
    2. Boulton, Thomas J. & Braga-Alves, Marcus V., 2020. "Price stabilization, short selling, and IPO secondary market liquidity," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 278-291.
    3. Jean-Sébastien Fontaine & James Pinnington & Adrian Walton, 2017. "What Drives Episodes of Settlement Fails in the Government of Canada Bond Market?," Staff Working Papers 17-54, Bank of Canada.
    4. Shyu, Yih-Wen & Chan, Kam C. & Liang, Hsin-Yu, 2018. "Spillovers of price efficiency and informed trading from short sales to margin purchases in absence of uptick rule," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 163-183.
    5. Archana Jain & Chinmay Jain, 2015. "Fails-to-Deliver before and after the Implementation of Rule 203 and Rule 204," The Financial Review, Eastern Finance Association, vol. 50(4), pages 611-636, November.
    6. Blau, Benjamin M. & Cox, Justin S. & Griffith, Todd G. & Voges, Ryan, 2023. "Daily short selling around reverse stock splits," Journal of Financial Markets, Elsevier, vol. 65(C).
    7. Melissa Porras Prado & Pedro A. C. Saffi & Jason Sturgess, 2016. "Ownership Structure, Limits to Arbitrage, and Stock Returns: Evidence from Equity Lending Markets," The Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3211-3244.
    8. repec:oup:revfin:v:29:y:2016:i:12:p:3211-3244. is not listed on IDEAS
    9. Jean-Sébastien Fontaine & Adrian Walton, 2020. "Contagion in Dealer Networks," Staff Working Papers 20-1, Bank of Canada.

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