Can Short Restrictions Actually Increase Informed Short Selling?

Abstract

We use the 2008 short selling regulations to test whether short sale restrictions can increase informed short selling. For the preborrow requirement, we find more negative price reactions to short interest announcements though no reliable increase in the price impact of short sales volume. For the stocks with banned short sales, we find an increase in the price impact of short sale volume though no reliable change in the price reaction to short interest announcements. Both restrictions, however, are associated with increased informed trading. Our results suggest that short restrictions will not reduce informed short selling and may actually result in an increase by increasing the proportion of informed short sellers..

Predatory Short Selling*

“…Their results suggest that price effects were temporary for stocks with negative pre-ban performance and permanent for firms with positive pre-ban performance. Kolasinski, Reed, and Thornock (2013) document that variations in short interest had larger price effects during the shorting ban, consistent with an increase in the informativeness of short sales in response to increased short-sale restrictions. 4 For a comprehensive survey of this literature, see Bond, Edmans, and Golstein (2012).…”

Predatory Short Selling

“…Their results suggest that price effects were temporary for stocks with negative pre-ban performance and permanent for firms with positive pre-ban performance. Kolasinski, Reed, and Thornock (2013) document that variations in short interest had larger price effects during the shorting ban, consistent with an increase in the informativeness of short sales in response to increased short-sale restrictions.…”

Distribution of Ownership, Short Sale Constraints, and Market Efficiency: Evidence from Cross‐Listed Stocks

“…21 Although the Bank of Montreal's stock was listed in the US options market during the ban, there was no open interest in these options throughout the period. Indeed, Kolasinski et al (2013) find that the cost increase did not deter informed investors willing to pay a premium in order to implement short sales synthetically via the options market. 22 Informed investors might not be as cost conscious as arbitrageurs.…”

“…Since all but one of the Canadian financials were optioned in both countries at the time, we are unable to split our treatment group into those short sale banned stocks that were optioned at the time, and those that were not, in order to test the substitute short selling venue hypothesis as Kolasinski, Reed, and Thornock (2013) did in their experiment. Most importantly, the increase in bid-ask spreads in the United States was roughly seven times as large as that observed in Canada.…”