Short-Selling Constraints Generate Overpricing: Evidence from Rule 201
60 Pages Posted: 14 Oct 2019
Date Written: July 31, 2019
The main contribution of this article is to establish a causal link between the imposition of short selling constraints and positive and significant abnormal returns, together with an improvement in liquidity. In the debate between the theory of overpricing (Miller (1977), Jones and Lamont (2002)) and the illiquidity hypothesis (Amihud and Mendelson, 1986), the data supports the former and rejects the latter for the short-selling constraints imposed by Rule 201 in the U.S. Our analysis uses the difference-in-differences methodology combined with a choice of treatment and controls based on the regression discontinuity approach that allows us to precisely select very similar assets as counterfactuals, and which explains the differences in findings from the previous literature. We use placebo tests to verify that our results are linked to the ban itself, and we find evidence that differences in the effect of short-selling constraints between small and large assets is more likely to be due to differences in the information content of price changes than to the firm’s market capitalization.
Keywords: short selling bans, abnormal returns, asset liquidity, Rule 201, alternative uptick rule
JEL Classification: G14, G18
Suggested Citation: Suggested Citation