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Restricted private information provision during short sale bans

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  • Yiuman Tse
  • Michael Williams
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    Abstract

    Purpose – The purpose of this paper is to examine the 2008 SEC short selling ban on financial firms and whether this ban negatively impacted private information provision in these short-restricted equities. Design/methodology/approach – This paper employs the French and Roll Variance Ratio (VR) as a proxy for private information provision in both an unconditional and conditional analysis. The unconditional analysis examines the VR across trading characteristics, firm characteristics, and time regimes. The conditional analysis models the VR in an event study framework where exogenous determinants of private information provision are held constant. Findings – Empirical results indicate that private information provision increased due to the 2007 US financial crisis while information provision decreased due to the 2008 short selling ban. This study concludes that the 2007 financial crisis enticed informed short sellers into the market which then increased information provision. Further, the 2008 short selling ban restricted these informed short sellers from the market thus leading to a decrease in information provision in the short-restricted firms. Interestingly, the information restricting effects of the 2008 ban were not severe enough to erode the gains in information provision originally induced by the financial crisis. Originality/value – This paper specifically contributes by demonstrating that the 2008 SEC short selling ban negatively impacted private information provision. This paper contributes generally by showing that short sale bans' information effects are not completely restrictive. Rather, short sale bans' information effects are a function of firm characteristics and contemporaneous market conditions.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 8 (August)
    Pages: 722-737

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:8:p:722-737

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    Related research

    Keywords: Financial control; Insider trading; Selling; Stock markets; United States of America;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Stephen E. Christophe & Michael G. Ferri & James J. Angel, 2004. "Short-Selling Prior to Earnings Announcements," Journal of Finance, American Finance Association, vol. 59(4), pages 1845-1876, 08.
    2. Hemang Desai & K. Ramesh & S. Ramu Thiagarajan & Bala V. Balachandran, 2002. "An Investigation of the Informational Role of Short Interest in the Nasdaq Market," Journal of Finance, American Finance Association, vol. 57(5), pages 2263-2287, October.
    3. Arturo Bris & William N. Goetzmann & Ning Zhu, 2007. "Efficiency and the Bear: Short Sales and Markets Around the World," Journal of Finance, American Finance Association, vol. 62(3), pages 1029-1079, 06.
    4. Jarrod Johnston & Jeff Madura & Joel Harper, 2005. "Interaction Between Short Selling and Potential Insider Selling in the IPO Aftermarket," Journal of Financial Services Research, Springer, vol. 27(3), pages 283-302, September.
    5. Jones, Charles M. & Lamont, Owen A., 2002. "Short-sale constraints and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 207-239.
    6. Owen A. Lamont & Jeremy C. Stein, 2004. "Aggregate Short Interest and Market Valuations," NBER Working Papers 10218, National Bureau of Economic Research, Inc.
    7. Senchack, A. J. & Starks, Laura T., 1993. "Short-Sale Restrictions and Market Reaction to Short-Interest Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(02), pages 177-194, June.
    8. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
    9. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, 04.
    10. Kenneth A. Kim & Hyun-Han Shin, 2004. "The Puzzling Increase in the Underpricing of Seasoned Equity Offerings," The Financial Review, Eastern Finance Association, vol. 39(3), pages 343-365, 08.
    11. Tom Arnold & Alexander W. Butler & Timothy Falcon Crack & Yan Zhang, 2005. "The Information Content of Short Interest: A Natural Experiment," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1307-1336, July.
    12. Joseph J. Seneca, 1967. "Short Interest: Bearish Or Bullish?," Journal of Finance, American Finance Association, vol. 22(1), pages 67-70, 03.
    13. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
    14. Danielsen, Bartley R. & Sorescu, Sorin M., 2001. "Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 451-484, December.
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