Research Shows Short-Selling Bans Can Cause More Harm Than Good
There is usually much hue and cry from all factions whenever short selling is banned. The proponents argue that the ban is useful in restoring order in chaotic markets; the opponents point to the pricing inefficiency such bans introduce by restraining the price discovery process. Above the cacophony of discordant voices, patient research can perhaps provide useful wisdom.
As we know, almost exactly three years ago, the U.S. Securities and Exchange Commission (SEC) banned short sales in the stocks of financial companies in a bid to restore calm following the collapse of Lehman Brothers. When the ban was lifted, academics Ekkehart Boehmer, Charles M. Jones, and Xiaoyan Zhang reviewed the U.S .evidence carefully, concluding in a 2009 paper that “stocks subject to the ban suffered a severe degradation in market quality, as measured by spreads, price impacts, and intraday volatility.”
Many other markets had followed the U.S. ban at around the same time. So, researchers Alessandro Beber and Marco Pagano extended the review to take a look at a wider sample of experiences in 30 countries. Their research confirmed the earlier findings cited above. Moreover, they also found that the bans did not generally provide better stock price performance, in contrast to regulators’ supposed intentions and hopes.
At the end of 2008, after the U.S. bans were lifted, SEC Chairman Christopher Cox commented: “Knowing what we know now, the Commission would not do it again. The costs appear to outweigh the benefits.”
It will be interesting to see what the European countries that have imposed recent bans will do when they review their decisions at the end of September. An old aphorism comes to mind: “Those who cannot learn from history are doomed to repeat it.”