Efficiency and the Bear: Short Sales and Markets around the World

We analyze cross-sectional and time series information from forty-seven equity markets around the world, to consider whether short-sales restrictions affect the efficiency of the market, and the distributional characteristics of returns to individual stocks and market indices. Using the approach developed in Moerck et al. (2000) we find significantly more crosssectional variation in equity returns in markets where short selling is feasible and practiced, controlling for a host of other factors. This evidence is consistent with more efficient price discovery at the individual security level. A common conjecture by regulators is that short-sales restrictions can reduce the relative severity of a market panic. We test this conjecture by examining the skewness of market returns. We find that in markets where short selling is either prohibited or not practiced, individual stock returns display significantly less negative skewness. However, at the market level, where regulators might expect short-sales restrictions to reduce the severity of broad declines, short sales restrictions appear to make no difference.