Accounting Irregularities and Failure to Deliver : An Examination of the Relationship between Naked Short Sales and Restatements

This article examines the relationship between naked short selling and accounting irregularities that cause a firm to issue a restatement. Using the level of fails to deliver as a proxy for naked short selling, we find evidence of increased naked short selling in anticipation, as well as in response to these announcements. Traders who engage in naked short selling are more likely to target larger firms, which is counter to the argument that naked short selling is the result of an inability to borrow the securities. Further, we find that more transparent announcements result in greater levels of naked short selling. The level of abnormal fails to deliver is positively related to both the volatility of the stock's return after the restatement announcement and the level of institutional ownership before the announcement