Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, November 23, 2016

Wang on Short Selling

Ye Wang has posted (Naked) Short Selling Around Earnings Announcement on SSRN with the following abstract:

Since short sellers are considered sophisticated traders and respond to corporate news and public information in a timely manner, corporate earnings announcements containing new information can be used to update the beliefs of short sellers and affect their investment strategies. Abnormal market reactions to earnings surprises are traditionally considered due to market mispricing or investor overreaction to unexpected corporate news; however, such mispricing is also determined by the functioning of the market microstructure. This paper uses an innovative dataset that includes detailed short sales information and fails-to-deliver (FTDs) at the settlement dates for all stocks listed in the New York Stock Exchange and NASDAQ to provide empirical evidence that the FTDs arising from naked short selling contribute to this mispricing around earnings announcements. Furthermore, this paper provides empirical evidence that, even after new regulation for restricting naked short sales, such misbehavior still causes price distortion during negative corporate events. This work also identifies multiple factors that could influence the (naked) short sales constraints of trading securities. The results show that institutional ownership, insider sales, short interests, and trading volume in a dark pool are important factors in the (naked) short sales of underlying stocks.

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