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When Constraints Bind

Author

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  • Diether, Karl B.

    (Dartmouth College)

  • Werner, Ingrid M.

    (Ohio State University)

Abstract

We create proxies for constrained supply of lendable shares by combining unique data on loan fees, stock lending activity, and failures to deliver to examine how often contrarian short sale strategies are affected by constraints. We find that constraints, as captured by our measures, clearly affect the strategies of NYSE and Nasdaq short sellers. In some cases 30%-40% of the cross-section experiences a significant reduction in the contrarian response of short sellers to past returns. However, only for extremely high levels of our constraint measures (top 1%) is contrarian behavior by short sellers completely eliminated. We also find that high minus low daily short selling activity portfolios produce abnormal returns for both constrained and unconstrained stocks.

Suggested Citation

  • Diether, Karl B. & Werner, Ingrid M., 2009. "When Constraints Bind," Working Paper Series 2009-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2009-15
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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2009/2009-15.pdf
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    Cited by:

    1. Gerlinde Fellner & Erik Theissen, 2006. "Short Sale Constraints, Divergence of Opinion and Asset Values: Evidence from the Laboratory," Labsi Experimental Economics Laboratory University of Siena 009, University of Siena.
    2. Fellner, Gerlinde & Theissen, Erik, 2014. "Short sale constraints, divergence of opinion and asset prices: Evidence from the laboratory," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 113-127.

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