Informed short selling, fails-to-deliver, and abnormal returns

•Stocks with fails-to-deliver (FTD) achieve negative and proportional abnormal returns.•These findings are consistent in an event study and portfolio returns analysis.•Estimated profits from shorting low and high FTD stocks are positive.•FTDs are nonrandom and increase with short sale demand.•FTDs reflect informed short selling with nonbinding shorts sale constraints.

We find that stocks with fails-to-deliver (FTDs) experience negative abnormal returns that are proportional to their FTD levels. These findings come from both an event study and a portfolio returns analysis using Fama-French factors. Using proprietary data on stock borrow costs, we also show that short sellers of low and high FTD stocks obtain positive estimated profits. Our findings support the hypothesis that FTDs reflect nonbinding short sale constraints which do not restrict informed short selling.