Skip to main content
SpringerLink
Log in

Naked Short Selling and the Market Impact of Fails-to-Deliver: Evidence from the Trading of Real Estate Investment Trusts

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

Naked short selling and purposeful fails-to-deliver have been identified in the popular press and by the SEC as contributing factors to the stock market decline in 2008. We investigate the market impact of the announcement that fails-to-deliver have occurred for a sample of real estate investment trusts (REITs). We find little evidence that this announcement affects returns or has any market manipulation ability. We find that fails-to-deliver are most consistent with a 1 to 3 days delivery difference between the short sale and offsetting covering trades. These results hold independent of the type of REIT (equity or mortgage REITs). Overall, our findings suggest that naked short selling and purposeful fails-to-deliver may not have contributed much to REIT losses during the financial crisis.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

Notes

  1. See http://www.sec.gov/comments/s7-30-08/s73008-108.pdf

  2. Moreover, the FTSE NAREIT All-REIT index declined (from 189.73 to 97.69, a 49 % decrease) more than the S&P 500 index (from 134.69 to 89.52, a 34 % decrease) during 2007–2008 (source: NAREIT). When we calculate buy-and-hold returns for all 48 Fama-French industries, using the 24 average monthly returns for the 2007–2008 period, we find no industry that performed worse than the real estate sector.

  3. Informed trading and information asymmetry for REITs is examined in Gyourko and Nelling (1996), Downs and Güner (1999), McDonald et al. (2000), and Clayton and MacKinnon (2000), Devos et al. (2007), among others. The consensus is that asymmetric information is relatively low for REITs.

  4. Ciochetti et al. (2002) also report high REIT institutional ownership. Institutional ownership for a matched non-REIT sample (using the Blau et al. (2011) algorithm) averages 57.7 %. Devos et al. (2012) report ongoing high institutional ownership during the financial crisis.

  5. Moreover, there are some other well established factors that make REITs an excellent laboratory to study events such as fails. For example, by focusing on REITs we eliminate a number of intra industry effects and REITs are homogeneous securities due to regulatory requirements (see Chui et al. (2003) and Chen et al. (2011)).

  6. Fails have been studied in other market contexts such as government bonds and currency. See for example, Johnson (1998), Kahn and Roberds (2001), and Fleming and Garbade (2002).

  7. Fail-to-deliver reporting requires a minimum of 10,000 shares that fail-to-deliver to be recorded in the database.

  8. A short seller cannot avoid losses due to adverse price movements by failing-to-deliver the shares. Once the short delivery obligation has been sent to the National Securities Clearing Corporation, losses from adverse price movements against the short position will occur in the account of the short initiator, whether the shares have been delivered or not.

  9. For more information on this issue see http://www.sec.gov/divisions/marketreg/204tfaq.htm.

  10. These intraday loan contracts are not the result of short sales that are initiated and then covered on the same trading day. Such trades will be netted within a clearing firm and no delivery obligation will be sent to the National Securities Clearing Corporation.

  11. REIT’s are identified in the CRSP database using the second digit (8) of the share code.

  12. We use the monthly S&P security owner stock guide to obtain information on institutional ownership.

  13. Option contract listing data comes from the CBOE website http://www.cboe.com/data/mktstat.aspx.

  14. Using this classification also ensures that all our sample REITs are REITs and not REOC’s.

  15. The SEC does state that fails may not be the result of short selling (http://www.sec.gov/foia/docs/failsdata.htm).

  16. This is similar Kolasinksi et al. (2009) and Boulton and Braga-Alves (2010).

  17. 14 of the sample REITs are included in the final short sale ban list found at http://www.nyse.com/about/listed/1222078675703.html. However none of the sample REITs were included on the initial short sale ban list issued by the SEC on 19 September 2008.

  18. We find almost identical results for long term Borrowing Costs (available upon request).

  19. Because the announcement of fails is prior to the evaluation of returns, causality can only move in one direction.

  20. See for example Boehmer et al. (2010), Asquith et al. (2005), Boehmer et al. (2008), and Diether et al. (2009).

  21. We also test for model misspecification (unreported) using the Ramsey Test and reject model misspecification.

References

  • Aitken, M., Frino, A., McCorry, M., & Swan, P. (1998). Short Sales are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange. Journal of Finance, 53, 2205–2223.

    Article  Google Scholar 

  • Asquith, P., Pathak, P., & Ritter, J. (2005). Short Interest, Institutional Ownership, and Stock Returns. Journal of Financial Economics, 78, 243–276.

    Article  Google Scholar 

  • Autore, D., Boulton, T., & Braga-Alves, M. (2011). Failures-to-Deliver, Short Sale Constraints, and Stock Overvaluation. Working Paper: Florida State University.

    Google Scholar 

  • Blau, B., Hill, M., & Wang, H. (2011). REIT Short Sales and Return Predictability. Journal of Real Estate Finance and Economics, 42, 481–503.

    Article  Google Scholar 

  • Boehmer, E., Huszar, Z., & Jordan, B. (2010). The good news in short interest. Journal of Financial Economics, 96, 80–97.

    Article  Google Scholar 

  • Boehmer, E., Jones, C., & Zhang, X. (2008). Which Shorts are Informed? Journal of Finance, 63, 491–527.

    Article  Google Scholar 

  • Boni, L. (2006). Strategic Delivery Failures in U.S. Equity Markets. Journal of Financial Markets, 9, 1–26.

    Article  Google Scholar 

  • Boulton, T., & Braga-Alves, M. (2010). The Skinny on the 2008 Naked Short-sale Restrictions. Journal of Financial Markets, 13, 397–421.

    Article  Google Scholar 

  • Chen, H., Downs, D., & Patterson, G. (2011). The Information Content of REIT Short Interest; Investment Focus and Heterogeneous Beliefs. Real Estate Economics, 39, 1–35.

    Article  Google Scholar 

  • Chui, A., Titman, S., & Wei, K. (2003). The Cross-section of Expected REIT Returns. Real Estate Economics, 31, 451–479.

    Article  Google Scholar 

  • Ciochetti, B., Craft, T., & Shilling, J. (2002). Institutional Investors’ Preferences for REIT Stocks. Real Estate Economics, 30, 567–593.

    Article  Google Scholar 

  • Clayton, J., & MacKinnon, G. (2000). Measuring and exploring changes in REIT liquidity: Beyond the bid-ask spread. Real Estate Economics, 28, 28–116.

    Article  Google Scholar 

  • Danielsen, B., & Sorescu, S. (2001). Why do option introductions depress stock prices? A study of diminishing short sale constraints. Journal of Financial and Quantitative Analysis, 36, 451–484.

    Article  Google Scholar 

  • D’Avolio, G. (2002). The market for borrowing stock. Journal of Financial Economics, 66, 271–306.

    Article  Google Scholar 

  • Devos, E., Ong, S., & Spieler, A. (2007). Analyst activity and firm value: Evidence from the REIT sector. Journal of Real Estate Finance and Economics, 35, 333–356.

    Article  Google Scholar 

  • Devos, E., S. Ong, A. Spieler and D. Tsang. (2012). REIT institutional ownership dynamics and the financial crisis. Journal of Real Estate Finance and Economics, forthcomingx

  • Diether, K. (2008). Short Selling, Timing, and Profitability. Working Paper. Ohio State University

  • Diether, K., Lee, K., & Werner, I. (2009). Short-sale strategies and return predictability. Review of Financial Studies, 22, 575–607.

    Article  Google Scholar 

  • Downs, D., & Güner, Z. (1999). Is the information deficiency in real estate evident in public market trading? Real Estate Economics, 27, 517–541.

    Article  Google Scholar 

  • Edwards, A., & Weiss-Hanley, K. (2010). Short selling in initial public offerings. Journal of Financial Economics, 98, 21–39.

    Article  Google Scholar 

  • Evans, R., Geczy, C., Musto, D., & Reed, A. (2009). Failure is an option: Impediments to short selling and option prices. Review of Financial Studies, 22, 1955–1980.

    Article  Google Scholar 

  • Fleming, M., & Garbade, K. (2002). When the Back Office Moved to the Front Burner: Settlement Fails in the Treasury Markets after 9/11. Federal Reserve Bank of New York Economic Policy Review, 8, 35–57.

    Google Scholar 

  • Gyourko, J., & Nelling, E. (1996). Systematic Risk and Diversification in the Equity REIT Market. Real Estate Economics, 24, 493–515.

    Article  Google Scholar 

  • Johnson, O. (1998). The payment system and monetary policy. International Monetary Fund Papers on Policy Analysis and Assessment, 94(4).

  • Kahn, C., & Roberds, W. (2001). The CLS Bank: A Solution to the Risks of International Payment Settlements? Carnegie-Rochester Conference Series on Public Policy, 54, 191–226.

    Article  Google Scholar 

  • Kolasinksi, A., A. Reed and J. Thornock. (2009). Prohibitions versus constraints: The 2008 short sales regulation. Working Paper. University of North Carolina at Chapel Hill.

  • Li, D., & Yung, K. (2004). Short interests in real estate investment trusts. International Real Estate Review, 7, 56–70.

    Google Scholar 

  • Lo, A., & Mackinlay, C. (1990). When are Contrarian Profits due to Stock Market Overreaction? Review of Financial Studies, 3, 175–205.

    Article  Google Scholar 

  • McDonald, C., Nixon, T., & Slawson, C. (2000). The Changing Asymmetric Information Component of REIT Spreads: A Study of Anticipated Announcements. Journal of Real Estate Finance and Economics, 20, 195–210.

    Article  Google Scholar 

  • Sorescu, S. (2000). The effect of options on stock prices. Journal of Finance, 45, 487–514.

    Article  Google Scholar 

Download references

Acknowledgments

We thank Tim McCormick, Piet Eichholtz (editor), Steven Jones, Jim Schneringer, Ting Foo Sing, an anonymous referee, and seminar participants at 2010 FMA, 2012 NUS-MIT-Maastricht Real Estate Symposium, and the University of Texas at El Paso for helpful comments. Jagadish Dandu provided help in data collection. We thank Ken French for data on industry returns. We retain responsibility for any remaining errors.

Author information

Authors and Affiliations

  1. College of Business Administration, University of Texas—El Paso, 500 W University Ave, El Paso, TX, 79968, USA

    Erik Devos & James Upson

  2. Fogelman College of Business and Economics, University of Memphis, 101 Fogelman College Admin. Bldg, Memphis, TN, 38152, USA

    Thomas McInish

  3. Faculty of Economics and Business, University of Sydney, Sydney, NSW, 2006, Australia

    Michael McKenzie

Authors
  1. Erik Devos
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Thomas McInish
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Michael McKenzie
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. James Upson
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Erik Devos.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Devos, E., McInish, T., McKenzie, M. et al. Naked Short Selling and the Market Impact of Fails-to-Deliver: Evidence from the Trading of Real Estate Investment Trusts. J Real Estate Finan Econ 49, 454–476 (2014). https://doi.org/10.1007/s11146-013-9438-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11146-013-9438-8

Keywords

JEL codes

Search

Navigation