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The impact of naked short selling on the securities lending and equity market

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  • Lecce, Steven
  • Lepone, Andrew
  • McKenzie, Michael D.
  • Segara, Reuben

Abstract

This paper examines the impact of naked short selling on equity markets where it is restricted to securities on an approved list. Consistent with Miller's (1977) intuition, stocks with the highest dispersion of opinions and short sale constraints are the only stocks to exhibit significant and negative abnormal returns in the post-event period. We also find slightly higher stock return volatility and a small reduction in liquidity when naked short sales are allowed. Overall, it impairs market quality (liquidity and volatility), although there appears to be some improvement in price efficiency in stocks with high short sale constraints.

Suggested Citation

  • Lecce, Steven & Lepone, Andrew & McKenzie, Michael D. & Segara, Reuben, 2012. "The impact of naked short selling on the securities lending and equity market," Journal of Financial Markets, Elsevier, vol. 15(1), pages 81-107.
    • Handle: RePEc:eee:finmar:v:15:y:2012:i:1:p:81-107
    DOI: 10.1016/j.finmar.2011.07.001
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    5. Stratmann, Thomas & Welborn, John W., 2013. "The options market maker exception to SEC Regulation SHO," Journal of Financial Markets, Elsevier, vol. 16(2), pages 195-226.
    6. Steven Lecce & Andrew Lepone & Michael D. McKenzie & Jin Boon Wong & Jin Y. Yang, 2018. "Short‐selling and credit default swap spreads—Where do informed traders trade?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 925-942, August.
    7. 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.
    8. Francis, Bill B. & Samuel, Gilna & Wu, Qiang, 2023. "The impact of short selling on dividend smoothing," Journal of Financial Stability, Elsevier, vol. 65(C).
    9. Jose Gutierrez & Steve Johnson & Robert Stretcher, 2018. "A synthesized model of short selling constraints and their impact on stock returns," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(1), pages 191-210, January.
    10. Sheridan Titman & Naoto Isaka, 2014. "Long-run Effects of Minimum Trading Unit Reductions on Stock Prices," International Review of Finance, International Review of Finance Ltd., vol. 14(1), pages 75-103, March.
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    More about this item

    Keywords

    Short sale constraints; Liquidity; Naked short selling; Australian Securities Exchange; Regression discontinuity design;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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