Which short-selling regulation is the least damaging to market efficiency? Evidence from Europe
Oscar Bernal, Astrid Herinckx, Ariane Szafarz
International Review of Law and Economics, 1 March 2014
Exploiting cross-sectional and time-series variations in European regulations during the July 2008–June 2009 period, we show that: (1) prohibition on covered short selling raises bid-ask spread and reduces trading volume, (2) prohibition on naked short selling raises both volatility and bid-ask spread, (3) disclosure requirements raise volatility and reduce trading volume, and (4) no regulation is effective against price decline. Overall, all short-sale regulations harm market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.
