NEWS

From the Wall Street Journal blog, June 16, 2009

A new paper by a trio of finance profs looks at the SEC-imposed ban on short-selling of certain financial stocks that surprised the market last September. The ban was put in place in hopes of restoring order to a market wracked by turmoil and confusion. Here are the bottom-line findings of the paper:

Stocks subject to the ban suffered a severe degradation in market quality, as measured by spreads, price impacts, and intraday volatility. Price effects are a bit harder to assign to the ban, as there is substantial confounding news about TARP and other government programs to assist the financial sector on the day that the ban is announced and implemented. When we look at firms that are added later to the ban list (and which are generally much less affected by the news about TARP, for example), we do not find a price bump at all. In fact, these stocks consistently underperform during the whole period the ban is in effect. This suggests that the shorting ban did not provide much of an artificial boost in prices.

Translation? As we might expect, without the shorts in the market liquidity dried up a bit, adding to costs and volatility. Also, researchers found that once they weeded out the effects of news about the government’s then-in-development TARP program by looking at companies less directly affected by the bailout bill, the shorting ban didn’t seem to add any price pop.

“Once we separate Tarp from shorting ban effects, there is no price pop at all,” wrote Ekkehart Boehmer, a professor at the Lundquist College of Business at the University of Oregon and one of the authors of the paper. “This is clearly not consistent with policy maker expectations if they have hoped to bump up valuations from their fair values, i.e., markets win this time.”