Banned by the Securities and Exchange Commission as an abusive practice to manipulate stock prices, naked short selling may instead be an information-based trading method based on accounting fundamentals, according to a soon-to-be published academic study.

The American Accounting Association is expecting a presentation at its Aug. 3-7 conference that will say naked short selling doesn't drive company financials. In fact, it's the other way around -- that company financials drive naked short selling, making it a predictor of future stock performance. The study is authored by Harrison Liu of the University of Texas San Antonio, and Sean T. McGuire and Edward P. Swanson of Texas A&M University.

“Our findings indicate that accounting fundamentals are highly influential in naked short-selling,” the authors wrote. “While we do not attempt to refute the claim that naked short-selling can be manipulative in some instances, we find consistent evidence across a range of tests that, on average, naked short selling is a type of information-based trading.”

The author say naked short sellers are adept at identifying companies that will experience poor stock returns in the next quarter, so a trading strategy based on naked shorting produces abnormal returns that are about seven times larger than a strategy using only covered short interest.

With traditional short-selling, investors borrow shares of a stock they believe to be overvalued and quickly sell them anticipating the stock price will fall. With naked short selling, the strategy is the same, except that the sellers don't actually borrow the stock before selling it, which artificially inflates the number of shares in circulation.

The SEC banned naked short selling with Regulation SHO in 2004 and amendments to it in 2009 intended to stop the practice of selling shares without delivering them right away. The SEC said sellers of securities should promptly deliver securities to the buyer because the failure to do so produces negative effects on markets and shareholders. An SEC administrative law judge recently fined a Charles Schwab affiliate and two individuals a combined $8.3 million to settle high-profile allegations of naked short selling, and the SEC recently blasted the Chicago Board Options Exchange for failing to understand how to enforce the ban.

The academic study examined data associated with naked short sales from 2005 through 2008 involving approximately 2,700 issuers, looking for a link between company financial results for a given quarter and the extent of naked shorting just prior to the publishing of those results. The study assessed company financial performance through measures involving profitability, financial leverage and liquidity, operating efficiency, capital expenditures, and sales growth. “Our findings show that recent actions by regulators to eliminate naked short sales are likely to impede informed arbitrage and reduce market efficiency,” the authors wrote.