Throwing in the Towel: When Short Sellers Fail-to-Deliver Price Reversals

33 Pages Posted: 5 Mar 2011

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

Tyler Brough

Utah State University

Date Written: March 4, 2011

Abstract

This study examines shorting activity, returns, and failures-to-deliver at the daily level. We find evidence that failures occur after periods of positive returns, which is consistent with the idea that short sellers are contrarian traders (Diether et al., 2009). We also find that the direct relation between failures and past returns is increasing is past shorting activity. We present two possible explanations for this observation. First, the increased demand for shorting activity dries up the fixed supply of lendable shares thus resulting in the inability of short sellers to borrow and deliver shares. Second, when short sellers are unable to predict price reversals, failures will occur. Our tests support the latter explanation as the direct relation between failures and past returns that is increasing in past shorting activity is driven by stocks with the greatest equity loan supply. Further, we find that abnormally high failures do not predict negative returns. Our results therefore support the argument that failures occur because short sellers have given up on predicting price reversals.

Suggested Citation

Blau, Benjamin M. and Brough, Tyler, Throwing in the Towel: When Short Sellers Fail-to-Deliver Price Reversals (March 4, 2011). Available at SSRN: https://ssrn.com/abstract=1777183 or http://dx.doi.org/10.2139/ssrn.1777183

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Tyler Brough

Utah State University ( email )

Logan, UT 84322
United States

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