New report argues in favour of naked shorting
29 July 2013 Texas
Image: Shutterstock
Accounting fundamentals are highly significant in explaining naked short sales, according to a recent study.
The report, authored by Harrison Liu of the University of Texas San Antonio, and Sean McGuire and Edward Swanson of Texas A&M University, showed that—contrary to accepted belief—accounting fundamentals are highly significant in explaining naked short sales.
“Citing a widely held belief that naked short selling is not based on company fundamentals, the SEC (2008) has substantially tightened Reg. SHO close-out regulations in an effort to eliminate naked short selling,” said the report's foreword.
It added that naked short sales contain incremental information about future stock prices.
“Abnormal returns from a long/short trading strategy that buys (sells short) shares with low (high) short interest are more than seven times larger using naked and covered short interest, compared to returns using only covered short interest (15.2 percent vs. 2.1 percent annualised).”
The study's aim was to show that recent regulatory actions to eliminate naked short sales are likely to impede informed arbitrage and reduce market efficiency.
The report, authored by Harrison Liu of the University of Texas San Antonio, and Sean McGuire and Edward Swanson of Texas A&M University, showed that—contrary to accepted belief—accounting fundamentals are highly significant in explaining naked short sales.
“Citing a widely held belief that naked short selling is not based on company fundamentals, the SEC (2008) has substantially tightened Reg. SHO close-out regulations in an effort to eliminate naked short selling,” said the report's foreword.
It added that naked short sales contain incremental information about future stock prices.
“Abnormal returns from a long/short trading strategy that buys (sells short) shares with low (high) short interest are more than seven times larger using naked and covered short interest, compared to returns using only covered short interest (15.2 percent vs. 2.1 percent annualised).”
The study's aim was to show that recent regulatory actions to eliminate naked short sales are likely to impede informed arbitrage and reduce market efficiency.
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