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

43 Pages Posted: 19 Mar 2009 Last revised: 10 Apr 2013

Adam C. Kolasinski

Texas A&M, Mays School of Business

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Jacob R. Thornock

Brigham Young University

Date Written: September 1, 2010

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.

Keywords: Financial crisis, short sales, regulation

JEL Classification: G14, G12, G18, G28

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: https://ssrn.com/abstract=1365037 or http://dx.doi.org/10.2139/ssrn.1365037

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

Brigham Young University ( email )

Provo, UT 84602
United States
8014220828 (Phone)

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