Did the 2008 Short-Sale Ban Prevent a Market Crash?

Abstract

This paper empirically examines the efficacy of the 2008 short-sale ban. We find that the firms covered by the ban experience positive abnormal returns at the ban initiation. When the ban expires, small banks, medium/large banks, and brokerage firms continue to experience positive abnormal returns, while other firms experience negative abnormal returns. The volatilities at the individual stock level and market level are higher in the ban period and remain high in the post-ban period. The frequency of extreme negative returns is smaller and the frequency of extreme positive returns is larger in the ban period relative to the pre-ban period. The extreme negative returns continue to decline and the extreme positive returns remain high in the post-ban period. Our overall evidence indicates that the ban has been successful at what it was intended to achieve, though we cannot rule out the possibility that liquidity and efficiency have deteriorated as a result of the ban.