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Short-Selling Bans and Bank Stability

Author

Listed:
  • Alessandro Beber
  • Daniela Fabbri
  • Marco Pagano
  • Saverio Simonelli

Abstract

In both the subprime crisis and the eurozone crisis, regulators imposed bans on short sales mainly aimed at preventing stock price turbulence from destabilizing financial institutions. Contrary to the regulators’ intentions, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones. Increases were larger for more vulnerable financial institutions. To take into account the endogeneity of short sales bans, we match banned financial institutions with unbanned ones with similar sizes and levels of riskiness and instrument the 2011 ban decisions with regulators’ propensity to impose a ban in the 2008 crisis. (JEL G01, G12, G14, G18)Received July 8, 2020; editorial decision September 8, 2020 by Editor Isil Erel.

Suggested Citation

  • Alessandro Beber & Daniela Fabbri & Marco Pagano & Saverio Simonelli, 2021. "Short-Selling Bans and Bank Stability," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(1), pages 158-187.
    • Handle: RePEc:oup:rcorpf:v:10:y:2021:i:1:p:158-187.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfaa022
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    Citations

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    Cited by:

    1. Srivastava, Jagriti & Gopalakrishnan, Balagopal, 2021. "In-kind financing during a pandemic: Trade credit and COVID-19," MPRA Paper 111433, University Library of Munich, Germany, revised Dec 2021.
    2. Cardillo, Giovanni & Onali, Enrico & Perdichizzi, Salvatore, 2024. "Investor behavior around targeted liquidity announcements," The British Accounting Review, Elsevier, vol. 56(6).
    3. Aminian, Armin, 2025. "Hush the rush: Short-selling bans in times of stress," BERG Working Paper Series 210, Bamberg University, Bamberg Economic Research Group.
    4. Luu, Ellie & Xu, Fangming & Zheng, Liyi, 2023. "Short-selling activities in the time of COVID-19," The British Accounting Review, Elsevier, vol. 55(4).
    5. Srivastava, Jagriti & Gopalakrishnan, Balagopal & Tharyan, Rajesh, 2024. "Product market shock, stakeholder relationships, and trade credit," The British Accounting Review, Elsevier, vol. 56(6).
    6. Bohl, Martin T. & Reher, Gerrit & Wilfling, Bernd, 2016. "Short selling constraints and stock returns volatility: Empirical evidence from the German stock market," Economic Modelling, Elsevier, vol. 58(C), pages 159-166.
    7. Fohlin, Caroline & Lu, Zhikun & Zhou, Nan, 2022. "Short sale bans may improve market quality during crises: New evidence from the 2020 Covid," SAFE Working Paper Series 365, Leibniz Institute for Financial Research SAFE.
    8. Prokop, Jörg & Walting, Matthias & Kahlen, Franziska, 2024. "Are more analysts better? The case of convertible bond announcement effects," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    9. Bartl, Jonas & Bostandzic, Denefa & Irresberger, Felix & Weiß, Gregor & Yang, Ruomei, 2024. "The 2008 short-selling ban’s impact on tail risk," Journal of Empirical Finance, Elsevier, vol. 78(C).
    10. Bessler, Wolfgang & Vendrasco, Marco, 2021. "The 2020 European short-selling ban and the effects on market quality," Finance Research Letters, Elsevier, vol. 42(C).
    11. Alessandro Spolaore & Caroline Le Moign, 2023. "Market impacts of the 2020 short selling bans," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(S1), pages 29-58, December.
    12. Mark S. Carey & Christopher Healy, 2024. "Short Selling and Bank Deposit Flows," Working Papers 24-05, Federal Reserve Bank of Cleveland.
    13. Bessler, Wolfgang & Vendrasco, Marco, 2022. "Short-selling restrictions and financial stability in Europe: Evidence from the Covid-19 crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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