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

Authors

Alessandro Frino, University of SydneyFollow
Steven Lecce, University of Sydney
Andrew Lepone, University of SydneyFollow

RIS ID

117934

Publication Details

Frino, A., Lecce, S. & Lepone, A. (2011). Short-sales constraints and market quality: Evidence from the 2008 short-sales bans. International Review of Financial Analysis, 20 225-236.

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.