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The 2008 Short Sale Ban: Liquidity, Dispersion of Opinion, and the Cross-Section of Returns of U.S. Financial Stocks

41 Pages Posted: 23 Jun 2009 Last revised: 5 Dec 2012

Don M. Autore

Florida State University - College of Business

Randall S. Billingsley

Virginia Polytechnic Institute & State University - Pamplin College of Business

Tunde Kovacs

University of Massachusetts Lowell

Date Written: January 19, 2011

Abstract

This study examines the cross-sectional impact of the 2008 short sale ban on the returns of U.S. financial stocks. Motivated by the large cross-sectional variation in the extent to which banned stocks suffer an illiquidity shock, we hypothesize that stocks with larger liquidity declines are associated with poorer contemporaneous stock returns. The evidence supports this hypothesis and suggests that this effect is stronger for more liquid stocks, as predicted by Amihud and Mendelson (1986). Moreover, consistent with Miller’s (1977) model, we report a valuation reversal whereby stocks with higher abnormal returns at the onset of the ban have lower abnormal returns at its removal. Our findings are robust when we control for firms most affected by TARP, include non-banned matched firms, and compare banned firms’ stock returns with their bond returns. From a policy standpoint, the ban reduced valuations, ceteris paribus, of the stocks that were hardest hit by illiquidity.

Keywords: Short sale ban, Liquidity, Dispersion of opinion

JEL Classification: G12, G14, G18, G28

Suggested Citation

Autore, Don M. and Billingsley, Randall S. and Kovacs, Tunde, The 2008 Short Sale Ban: Liquidity, Dispersion of Opinion, and the Cross-Section of Returns of U.S. Financial Stocks (January 19, 2011). Available at SSRN: https://ssrn.com/abstract=1422728 or http://dx.doi.org/10.2139/ssrn.1422728

Don M. Autore

Florida State University - College of Business ( email )

821 ACADEMIC WAY, Room 314 RBA
P.O. Box 3061110
Tallahassee, FL 32306-1110
United States
850-644-7857 (Phone)

Randall S. Billingsley

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

Dept. of Finance Pamplin 2112
Blacksburg, VA 24061
United States
540-231-7374 (Phone)
540-231-3155 (Fax)

Tunde Kovacs (Contact Author)

University of Massachusetts Lowell ( email )

1 University Ave
Lowell, MA 01854
United States

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