Are Short-Selling Restrictions Effective?

Abstract

Despite strong theoretical predictions based on disagreement, limited empirical evidence links short-selling restrictions to higher prices. We test this relationship using quasi-experimental methods based on rule 201, a threshold-based policy that restricts aggressive short selling when intraday returns cross −10%. When comparing stocks on either side of the threshold in the same hour of trading, we find that the restriction leads to 8% lower short-sale volume and 35 basis points higher daily returns. These price effects do not reverse after the restriction is lifted. This paper was accepted by Bruno Biais, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.4987 .