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http://ssrn.com/abstract=1365037
 
 

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Can Short Restrictions Result in More Informed Short Selling? Evidence from the 2008 Regulations


Adam C. Kolasinski


Texas A&M, Mays School of Business

Adam V. Reed


University of North Carolina Kenan-Flagler Business School

Jacob R. Thornock


University of Washington - Michael G. Foster School of Business

September 1, 2010

AFA 2010 Atlanta Meetings Paper

Abstract:     
We use the 2008 short selling regulations to conduct the first test of Diamond and Verrecchia’s (1987) counterintuitive prediction that short sale constraints can actually increase the information content of short sales. The emergency order made it difficult and costly for short sellers without strong broker relationships to borrow shares; borrowing fees increased by over 500%. Similarly, the short selling ban prohibited short selling in the spot market, but sophisticated traders could still short synthetically via the options market. As such, there is good reason to expect that both regulations increased the proportion of informed short sellers. Consistent with this notion, we find that the price reaction to announcements of unexpectedly high levels of short interest became more negative when the regulations were in effect. We also find that the price impact of short sales increased during the ban for affected stocks. Our results confirm the counterintuitive and previously untested prediction that short selling restrictions may actually increase the information content of short selling.

Number of Pages in PDF File: 43

Keywords: Financial crisis, short sales, regulation

JEL Classification: G14, G12, G18, G28

working papers series


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Date posted: March 19, 2009 ; Last revised: April 10, 2013

Suggested Citation

Kolasinski, Adam C. and Reed, Adam V. and Thornock, Jacob R., Can Short Restrictions Result in More Informed Short Selling? Evidence from the 2008 Regulations (September 1, 2010). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1365037 or http://dx.doi.org/10.2139/ssrn.1365037

Contact Information

Adam C. Kolasinski (Contact Author)
Texas A&M, Mays School of Business ( email )
360 Wehner
College Station, TX 77843-4218
United States
Adam V. Reed
University of North Carolina Kenan-Flagler Business School ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Jacob Thornock
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
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