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Short Selling: The Impact of SEC Rule 201 of 2010

Authors


  • The authors thank Peter Abric, Paul Bennett, Christine Jiang, Tim McCormick, Maureen O’Hara, Pankaj Patel, Andriy Shkilko, Elvira Sojli, and Wei Zhang for helpful comments. We have also benefited from discussion at the Midwest Finance Association annual conference in March 2011 in Chicago, the Mid-Atlantic Research conference in March 2011 at Villanova, the Eastern Finance Association annual conference in March 2011 at Savannah, the RISE conference in April 2011 at Dayton, the Annual RMA/UNC Academic Forum on Securities Lending Research in April 2011 at New York, Financial Management Association European annual conference in June 2011 at Porto, Portugal, and a seminar presentation at The University of Memphis. We thank the Center of International Business Education and Research at The University of Memphis for financial support.

Fogelman College of Business 425, The University of Memphis, Memphis, TN 38152; Phone: (901) 277 9202; Fax: (901) 678 3006; E-mail: tmcinish@memphis.edu.

Abstract

Despite its sizeable compliance costs, we are unable to document any clear benefits of SEC Rule 201 in ensuring fair valuations and price stability, promoting higher liquidity and execution quality, or preventing a sudden flash crash or prolonged market crises. Our daily and intraday analysis of data both before and after Rule 201 finds that short sellers are naturally more active before the occurrence of negative returns, not after significant price declines. Our simulation results show that Rule 201 further curtails short selling during normal periods, but is not binding on short sellers during the volatile period of the 2008 financial crisis.

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