Can Short Restrictions Actually Increase Informed Short Selling?


  • Adam C. Kolasinski,

  • Adam Reed,

  • Jacob R. Thornock

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    • Adam C. Kolasinski is an Assistant Professor of Finance at the University of Washington in Seattle, WA. Adam Reed is the Julian Price Scholar and an Associate Professor of Finance at the University of North Carolina in Chapel Hill, NC. Jacob R. Thornock is an Assistant Professor of Accounting at the University of Washington in Seattle, WA.

  • We are grateful to Bill Christie (Editor) and an anonymous referee for helpful suggestions and comments. We thank Frank Hatheway at Nasdaq, as well as others who provided and assisted with proprietary data and to Jefferson Duarte, Lew Thorson, and Lance Young for their assistance in computing PIN. We also thank seminar participants at Notre Dame, UNC, the 2009 FEA Conference, the 2010 AFA Annual Meeting, and the 2010 RMA Conference, discussants Ankur Pareek, Robert Van Ness, and Ingrid Werner for helpful comments, as well as Ferhat Akbas, Robert Battalio, Jennifer Conrad, Karl Diether, Mike Drake, Amy Edwards, Frank Hatheway, Pab Jotikasthira, Charles Jones, Stewart Mayhew, Matt Ringgenberg, Paul Schultz, and Sorin Sorescu. A previous version of this paper was called “Prohibitions versus Constraints: The 2008 Short Sales Regulations.”


We use the 2008 short selling regulations to test whether short sale restrictions can increase informed short selling. For the preborrow requirement, we find more negative price reactions to short interest announcements though no reliable increase in the price impact of short sales volume. For the stocks with banned short sales, we find an increase in the price impact of short sale volume though no reliable change in the price reaction to short interest announcements. Both restrictions, however, are associated with increased informed trading. Our results suggest that short restrictions will not reduce informed short selling and may actually result in an increase by increasing the proportion of informed short sellers..