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

Steven Lecce; Andrew Lepone; Michael D. McKenzie; Reuben Segara

doi:10.1016/j.finmar.2011.07.001

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

Steven Lecce, Andrew Lepone^*, Michael D. McKenzie, Reuben Segara

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

18 Citations (Scopus)

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.

Original language	English
Pages (from-to)	81-107
Number of pages	27
Journal	Journal of Financial Markets
Volume	15
Issue number	1
DOIs	https://doi.org/10.1016/j.finmar.2011.07.001
Publication status	Published - Feb 2012
Externally published	Yes

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10.1016/j.finmar.2011.07.001

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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.",

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AB - 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.

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

Abstract

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