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Beber & Pagano Essay

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THE JOURNAL OF FINANCE • VOL. LXVIII, NO. 1 • FEBRUARY 2013

Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis
ALESSANDRO BEBER and MARCO PAGANO∗ ABSTRACT
Most regulators around the world reacted to the 2007–09 crisis by imposing bans on short selling. These were imposed and lifted at different dates in different countries, often targeted different sets of stocks, and featured varying degrees of stringency. We exploit this variation in short-sales regimes to identify their effects on liquidity, price discovery, and stock prices. Using panel and matching techniques, we find that bans (i) were detrimental for liquidity, especially for stocks with small capitalization and no listed options; (ii) slowed price discovery, especially in bear markets, and (iii) failed to support prices, except possibly for U.S. financial stocks.

“The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets” (Christopher Cox, SEC Chairman, 19 September 2008, SEC News Release 2008–211). “Knowing what we know now, I believe on balance the commission would not do it again. The costs (of the short-selling ban on financials) appear to outweigh the benefits.” (Christopher Cox, telephone interview to Reuters, 31 December 2008). MOST STOCK EXCHANGE REGULATORS around the world reacted to the 2007–09 financial crisis by imposing bans or constraints on short sales. These hurried interventions, which varied considerably in intensity, scope, and duration, were presented as measures to restore the orderly functioning of securities markets and limit unwarranted drops in securities prices capable of exacerbating the crisis. SEC News Release 2008–211, which announced the short-sales
∗ Beber is with Cass Business School and CEPR, and Pagano is with Universita di Napoli ` Federico II, CSEF, EIEF, and CEPR. We thank Cam Harvey, an anonymous Associate Editor, an anonymous referee, Viral Acharya, Bruno Biais, Dimitris Christelis, Matthew...

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