Stratmann & Welborn on Short Selling

Thomas Stratmann and John W. Welborn have posted Informed Short Selling in High Fail-to-Deliver Stocks on SSRN with the following abstract:

We find that stocks with high fails-to-deliver (FTDs) experience abnormal negative returns, both in future and present periods. These findings come from both an event study and a portfolio returns analysis using Fama-French factors. They are consistent with previous research documenting that high short interest stocks experience abnormal negative returns. Using proprietary data on stock borrow costs, we also show evidence that short sellers of high FTD stocks, on average, obtain economic profits from their trades. These findings provide support for the hypothesis that high FTD levels reflect a nonbinding short sale constraint that does not restrict informed short selling.