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Short-sales constraints and market quality: Evidence from the 2008 short-sales bans

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  • Frino, Alex
  • Lecce, Steven
  • Lepone, Andrew
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    Abstract

    Using data from fourteen equity markets, this study empirically examines the impact of the 2008 short-selling bans on market quality. Evidence indicates that restrictions on short-selling lead to artificially inflated prices, indicated by positive abnormal returns. This is consistent with Miller's (1977) overvaluation theory, and suggests that the bans are effective in temporarily stabilizing prices in struggling financial stocks. Market quality is reduced during the restrictions, as evidenced by wider bid-ask spreads, increased price volatility and reduced trading activity. While these effects are strong, regulators may view the deterioration in market quality as a necessary by-product of the bans to maintain prices and protect investors.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 20 (2011)
    Issue (Month): 4 (August)
    Pages: 225-236

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    Handle: RePEc:eee:finana:v:20:y:2011:i:4:p:225-236

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    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Short-sale constraints Short-selling;

    References

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