Short-Selling Bans Around the World: Evidence from the 2007-09 Crisis
Alessandro Beber, University of Amsterdam
Marco Pagano, University di Napoli Federico II

Most stock exchange regulators around the world reacted to the 2007-2009 crisis by imposing bans or regulatory constraints on short-selling. Short-selling restrictions were imposed and lifted at different dates in different countries, often applied to different sets of stocks and featured different degrees of stringency. We exploit this considerable variation in short-sales regimes to identify their effects on liquidity, price discovery and stock prices. Using panel data and matching techniques, we find that bans (i) were detrimental for liquidity, especially for stocks with small market capitalization, high volatility and no listed options; (ii) slowed down price discovery, especially in bear market phases, and (iii) failed to support stock prices, except possibly for U.S. financial stocks.

Many investment managers employ short selling strategies and many more are affected by those who do. This project examines the effects upon the markets of restrictions on short selling strategies during periods of market stress. The results are important for public policy and for planning trading strategies during market crises.