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Aalto University Abstract School of Business June 19, 2013 Department of Finance Master's Thesis Riku Ahvenainen Number of pages 76

TRADE LEVEL DELIVERY FAILURES: NEW EVIDENCE FROM THE FINNISH MARKET

PURPOSE OF THE STUDY:

The purpose of this study is to examine delivery failures at trade level and determine which factors affect the likelihood of delivery failures. In the existing literature cost of borrowing stock is found to have relation to delivery failures but these studies are conducted by using aggregated data and are done in the U.S context. This study applies trade level data from the Finnish market, providing new evidence on delivery failures. This study also illustrates for the reader how the post-trade processes work and what are the differences between markets.

DATA:

This thesis applies trade level data of a remote broker operating in the Finnish market. All OTC trades settled during a six month period from January to June 2012 are included in the original sample. The analyzed sample consists of 4153 deliveries, of which 242 deliveries are failures. In addition, stock specific variables are determined for each trade in order to proxy the cost of borrowing. Market capitalization, turnover, cash flow and price-to-book data are from Thomson One Banker database, institutional ownership data are from Orbis database and Internet message board activity is collected from Kauppalehti's Internet message board.

RESULTS:

The results show that delivery failures are mostly short-term in the Finnish market, lasting one to three days. The results give support for the hypotheses that when stock loan supply increases, the likelihood of delivery failures decreases, and when the stock loan demand increases due to differences of opinion among investors, the likelihood increases. Increase in market capitalization decreases the likelihood of delivery failures, having marginal effect up to -11.35%. Turnover, price-to-book and Internet message board activity increase the likelihood of short-term delivery failures.