Manipulation, Panic Runs, and the Short Selling Ban

57 Pages Posted: 10 Mar 2020

See all articles by Pingyang Gao

Pingyang Gao

Booth School of Business, University of Chicago

Xu Jiang

Duke University

Jinzhi Lu

City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: February 18, 2020

Abstract

This paper identifies conditions under which a short selling ban improves the ex-ante firm value. Short selling improves price discovery and enables stakeholders to make better investment decisions. However, manipulative short selling can arise as a self-fulfilling equilibrium, resulting in inefficient investment decisions. The adverse effect is amplified by the firm's vulnerability to panic runs. Overall, short selling reduces ex-ante firm value if the firm is very vulnerable to runs and the speculator's information quality is not too good. Our results contribute to understanding of the function of short selling in the capital markets and to the controversy around the regulation of short selling.

Keywords: Feedback effect, coordination games, short selling regulation, manipulative short selling, real effects

JEL Classification: G14, G39, M48

Suggested Citation

Gao, Pingyang and Jiang, Xu and Lu, Jinzhi, Manipulation, Panic Runs, and the Short Selling Ban (February 18, 2020). Available at SSRN: https://ssrn.com/abstract=3540328 or http://dx.doi.org/10.2139/ssrn.3540328

Pingyang Gao

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Xu Jiang (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Jinzhi Lu

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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