The Naked Truth

Abstract

This article surveys some of the existing literature on short-selling as well as new evidence of the market phenomenon known as naked short selling. It examines naked shorting and how it differs from conventional short selling of equity shares and goes on to detail the pervasiveness of naked shorting, the process by which it occurs, and its impact on security analysis, equity valuation, and corporate governance. The impact naked shorting has on the markets, regulators, and investors is significant both in scope and in breadth, particularly with respect to the amount of dollars and the number of investors involved. This article explores previously offered explanations of short sale constraints through a perspective independent of heterogeneous agents or beliefs about asset payoffs subject to short sale constraints. In this framework, the beliefs of optimistic, pessimistic, or rational investors are marginalized, as are their ownership rights.