Are Short Selling Restrictions Effective?

Abstract

Despite strong theoretical predictions based on disagreement, limited empirical evidence has linked short selling restrictions to higher prices. We test this relationship using quasi-experimental methods based on Rule 201, a threshold-based policy that restricts aggressive short selling when intraday returns cross -10%. When comparing stocks on either side of the threshold in the same hour of trading, we find that the restriction leads to 8% lower short sale volume and 35 bps higher daily returns. These price effects do not reverse after the restriction is lifted.

Keywords: short selling, uptick rule, securities regulation, Rule 201, short selling restrictions

JEL Classification: G12, G14