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 (UNC) at Chapel Hill - Finance Area
Jacob R. Thornock
University of Washington - Michael G. Foster School of Business
September 1, 2010
AFA 2010 Atlanta Meetings Paper
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, G28working papers series
Date posted: March 19, 2009 ; Last revised: April 10, 2013
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