NEWS

The three-week ban on short selling during 2008 for nearly 800 U.S. financial stocks had “severe market quality consequences,” according to a recent study. Professors Don M. Autore (Florida State Universiy), Randall S. Billingsley (Virginia Polytechnic Institute and State University), and Tunde Kovacs (Northeastern University; Virginia Polytechnic Institute & State University) found that the ban:
• Caused large increases in relative quoted spreads and decreases in the average number of trades per day, consistent with a reduction in market quality
• Resulted in banned stocks, that faced the greatest widening in their spreads, experiencing weaker abnormal stock performance during and after the ban

“We . . .find a significantly greater decrease in valuation among banned stocks that suffer a severe deterioration in market quality,” the researchers conclude (“Short Sale Constraints, Dispersion of Opinion, and Market Quality: Evidence from the Short Sale Ban on U.S. Financial Stocks”). “This effect persists after the ban expires. A pre- to post-ban deterioration in market quality is met with a large contemporaneous abnormal decline in stock prices. The evidence is consistent with the argument that the ban has a lasting differential valuation consequence with respect to its effect on market quality. The policy implications of our findings are problematic. It is arguable that the SEC’s actions may have curbed excessive price declines for troubled firms without lasting differential valuation consequences for higher vs. lower dispersion stocks. However, the success of the short sale ban of 2008 was achieved at the cost of a severe deterioration in market quality.”

Available at SSRN: http://ssrn.com/abstract=1422728