Are Short Selling Restrictions Effective?

70 Pages Posted: 19 Mar 2019 Last revised: 8 Sep 2020

See all articles by Yashar H. Barardehi

Yashar H. Barardehi

Chapman University - The George L. Argyros School of Business & Economics

Andrew Bird

Chapman University - The George L. Argyros School of Business & Economics

Stephen A. Karolyi

Office of the Comptroller of the Currency

Thomas Ruchti

Carnegie Mellon University - Department of Accounting

Date Written: November 19, 2019

Abstract

Despite strong theoretical predictions based on disagreement, limited empirical evidence has linked short selling restrictions to higher prices. We test this relationship using quasi-experimental methods based on Rule 201, a threshold-based policy that restricts aggressive short selling when intraday returns cross -10%. When comparing stocks on either side of the threshold in the same hour of trading, we find that the restriction leads to 8% lower short sale volume and 35 bps higher daily returns. These price effects do not reverse and are not associated with information events, suggesting that Rule 201 restricts short selling based on transient opportunities unrelated to fundamentals. Although these persistent direct effects align with policymaker objectives, we find evidence of offsetting transient spillover effects on peer stocks consistent with cross-stock substitution by short sellers.

Keywords: short selling, uptick rule, securities regulation, Rule 201, short selling restrictions

JEL Classification: G12, G14

Suggested Citation

Barardehi, Yashar and Bird, Andrew and Karolyi, Stephen A. and Ruchti, Thomas, Are Short Selling Restrictions Effective? (November 19, 2019). Available at SSRN: https://ssrn.com/abstract=3343797 or http://dx.doi.org/10.2139/ssrn.3343797

Yashar Barardehi (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

HOME PAGE: http://sites.google.com/site/barardehi/

Andrew Bird

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Thomas Ruchti

Carnegie Mellon University - Department of Accounting ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

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