The Causal Effects of Short-Selling Bans: Evidence from Eligibility Thresholds

Abstract

We identify the causal effects of short-selling bans on stock prices using regression discontinuity (RD). We exploit three threshold-based rules that determine a stock's short-selling eligibility on the Hong Kong Stock Exchange. Short-selling bans affect short-selling volume at all thresholds. Despite this, bans do not affect price levels. Stock returns, volatility, and crash risk are not different for banned vs. unrestricted stocks when appropriate counterfactual stocks are used to measure a ban's effects. Our findings suggest that short-selling bans are not as costly as previously argued, but are ineffective at reducing volatility or buttressing prices.

Keywords: Short Selling, Regression Discontinuity, Financial Market Regulation

JEL Classification: G12, G15, G18