Sunday, June 7, 2009
Shackling Short Sellers: The 2008 Shorting Ban, by Ekkehart Boehmer, University of Oregon - Charles H. Lundquist School of Business; Texas A&M University - Mays Business School, and Charles M. Jones, Columbia Business School, and Xiaoyan Zhang, Cornell University - Samuel Curtis Johnson Graduate School of Management, was recently posted on SSRN. Here is the abstract:
In September 2008, the U.S. Securities and Exchange Commission (SEC) surprised the investment community by adopting an emergency order that temporarily banned most short sales in nearly 1,000 financial stocks. In this paper, we study changes in stock prices, the rate of short sales, the aggressiveness of short sellers, and various liquidity measures before, during, and after the shorting ban. We match banned stocks to a control group of non-banned stocks in order to identify these effects. Shorting activity drops by about 65%. Stocks subject to the ban suffered a severe degradation in market quality, as measured by spreads, price impacts, and intraday volatility. Prices of stocks subject to the ban increase sharply, but it is difficult to assign this effect to the ban because the Troubled Asset Relief Program (TARP) and other programs were announced the same day. In fact, we find no positive share price effects in stocks that were added to the ban list later, suggesting that the ban may not have provided much of an artificial price boost.