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The Causal Effects of Short-Selling Bans: Evidence from Eligibility Thresholds

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  • Alan D Crane
  • Kevin Crotty
  • Sébastien Michenaud
  • Patricia Naranjo
Abstract
We identify the causal effects of short-selling bans on stock prices using regression discontinuity (RD). We exploit three threshold-based rules that determine a stock’s short-selling eligibility on the Hong Kong Stock Exchange. Short-selling bans have a large effect on short-selling volume at all thresholds. Despite this, bans do not affect stock prices. Stock returns, volatility, and crash risk are not different for banned versus unrestricted stocks when appropriate counterfactual stocks are used to measure a ban’s effects. Our findings suggest that short-selling bans are not as costly as previously argued, but are ineffective at reducing volatility or buttressing prices. Received September 13, 2017; editorial decision April 29, 2018 by Editor Jeffrey Pontiff.

Suggested Citation

  • Alan D Crane & Kevin Crotty & Sébastien Michenaud & Patricia Naranjo, 2019. "The Causal Effects of Short-Selling Bans: Evidence from Eligibility Thresholds," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 9(1), pages 137-170.
    • Handle: RePEc:oup:rasset:v:9:y:2019:i:1:p:137-170.
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    File URL: http://hdl.handle.net/10.1093/rapstu/ray004
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    Cited by:

    1. Larry Su & Elmina Homapour & Francisco Chiclana, 2022. "Short-Sale Constraints and Stock Prices: Evidence from Implementation of Securities Refinancing Mechanism in Chinese Stock Markets," Mathematics, MDPI, vol. 10(17), pages 1-21, September.
    2. Boulton, Thomas J. & Smart, Scott B. & Zutter, Chad J., 2020. "Worldwide short selling regulations and IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 62(C).
    3. Deng, Xiaohu & Gao, Lei & Kim, Jeong-Bon, 2020. "Short-sale constraints and stock price crash risk: Causal evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 60(C).
    4. Srivastava, Pranjal & Jacob, Joshy, 2022. "Arbitrage constraints and behaviour of volatility components: Evidence from a natural experiment," IIMA Working Papers WP 2022-10-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    5. Juwon Jang & Eunju Lee, 2024. "CEO confidence matters: the real effects of short sale constraints revisited," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 603-636, February.

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