Short Selling Bans Generally Don’t Work!
Public Service Announcement:
To all the free-market pro-competition haters of the world that believe government regulation solves all our problems, please read the following paper.
Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis
- Alessandro Beber and Marco Pagano
- A recent version of the paper can be found here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1502184
- The published version can be found here: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2012.01802.x/pdf
Most regulators around the world reacted to the 2007-09 crisis by imposing bans or constraints on short-selling. These were imposed and lifted at different dates in different countries, often applied to different sets of stocks and featured varying degrees of stringency. We exploit this variation in short-sales regimes to identify their effects on liquidity, price discovery and stock prices. Using panel and matching techniques, we find that bans (i) were detrimental for liquidity, especially for stocks with small capitalization and no listed options; (ii) slowed down price discovery, especially in bear markets, and (iii) failed to support prices, except possibly for U.S. financial stocks [Author comment: Did we really need to support the largest leaches known to mankind?].
Daily data for 16,491 stocks in 30 countries from January 2008 to June 2009.
Bid/Ask spreads increase:
Price discovery sucks:
Key Takeaway: Stay out of the Markets, Mr. Government.
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Definitions of common statistics used in our analysis are available here (towards the bottom)