Everything Old is New Again
5 Pages Posted: 11 Jul 2011 Last revised: 27 Jul 2011
Date Written: July 7, 2011
The Securities and Exchange Commission’s new Rule 201 restricts the short selling of stocks after a 10 percent price decline, with the intention of preventing short selling from further driving down stock prices. However, empirical evidence from recent stock price declines suggests the rule is unnecessary. We found that even before the approval of Rule 201 in February of 2010, short-selling declined for stocks that experience a 10 percent intraday decline. In other words, short sellers are more active before price declines than after. This finding held when we analyzed short selling on both a daily and intraday basis. In contrast, we found that short selling increased for stocks that experience positive returns. These results held true for all market conditions, whether the market was up, down, or neutral.
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