Short-Selling Constraints Generate Overpricing: Evidence from Rule 201

60 Pages Posted: 14 Oct 2019

See all articles by Oscar H. Florindo

Oscar H. Florindo

Universidad Carlos III de Madrid - Department of Business Administration

Jose S. Penalva Zuasti

affiliation not provided to SSRN

Mikel Tapia

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: July 31, 2019

Abstract

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

H. Florindo, Oscar and Penalva Zuasti, Jose S. and Tapia, Mikel, Short-Selling Constraints Generate Overpricing: Evidence from Rule 201 (July 31, 2019). Available at SSRN: https://ssrn.com/abstract=3462704 or http://dx.doi.org/10.2139/ssrn.3462704

Oscar H. Florindo (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Jose S. Penalva Zuasti

affiliation not provided to SSRN

Mikel Tapia

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Register to save articles to
your library

Register

Paper statistics

Downloads
18
Abstract Views
103
PlumX Metrics