The Effect of Short Sale Restrictions on Corporate Managers

Abstract

We examine how the exemption of short sale uptick tests due to the Regulation SHO pilot program affects managers’ decisions to abandon value-reducing acquisition attempts. We find that when deciding whether to abandon value-reducing acquisition attempts during the program, managers of pilot firms, whose stocks are less subject to short selling impediments, are more sensitive to stock price changes than managers of nonpilot firms. We find no difference in managers’ sensitivity prior to nor post SHO. These results highlight a cost of short selling restrictions: market prices become less informative. The message is that regulators should consider the loss of market information when weighing the costs and benefits of restrictions on the trading of market participants.

Keywords: Short Sale Restrictions, Short Selling, Regulation SHO, Pilot Program

JEL Classification: G14, G18, G30, G34